COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence and Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services
Date: 2018-03-21
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: corporation tax, digital single market, digital technology, establishment, provision of services, tax harmonisation, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.3.2018  SWD(2018) 81 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence   and  Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services {COM(2018) 147 final}  - {COM(2018) 148 final} - {SWD(2018) 82 final}  
 
 
Table of Contents 

1. 

2. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 4 

PROBLEM DEFINITION ..................................................................................................................... 8 

2.1  What are the problem drivers? .......................................................................... 8 
2.2  What are the consequences? ............................................................................ 16 

3.  WHY SHOULD THE EU ACT? ......................................................................................................... 20 

3.1  Legal basis ....................................................................................................... 20 
3.2  Subsidiarity: Necessity of EU action .............................................................. 20 
3.3  Subsidiarity: Added value of EU action .......................................................... 21 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? ................................................................................ 22 

4.1  General objectives ........................................................................................... 22 
4.2  Specific objectives ........................................................................................... 23 

5.  WHAT ARE THE AVAILABLE COMPREHENSIVE POLICY OPTIONS? .................................. 23 

5.1  What is the baseline against which options are assessed? .............................. 23 
5.2  What are the available comprehensive policy options? .................................. 28 
5.3  Policy options discarded at an early stage ....................................................... 34 

6.  WHAT ARE THE IMPACTS OF THE COMPREHENSIVE POLICY OPTIONS? ......................... 35 

6.1  Realigning profit allocation rules with value creation intra-EU  - Options 1 

and 2 ................................................................................................................ 35 

6.2  Option  3:  Realigning  profit  allocation  rules  with  value  creation  intra-EU 

and recommendation to change rules vis-à-vis third countries ....................... 43 
6.3  Type and level of digital activities .................................................................. 44 
Impact on small and medium-sized enterprises .............................................. 47 
6.4 

7.  HOW DO THE COMPREHENSIVE OPTIONS COMPARE? .......................................................... 48 

8. 

PREFERRED COMPREHENSIVE OPTION..................................................................................... 49 

8.1  Description of the preferred comprehensive option ........................................ 49 
8.2  Administrative burden and compliance costs .................................................. 51 
8.3  Subsidiarity and proportionality of the preferred option ................................. 52 

9. 

INTERIM SOLUTION ....................................................................................................................... 53 

9.1  What is the baseline against which the interim solution is assessed? ............. 53 
9.2  What are the available interim policy options? ............................................... 55 
9.3  What are the impacts of interim policy options? ............................................. 60 
9.4  Preferred interim option .................................................................................. 78 

10.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? .................................. 80 

10.1  Monitoring arrangements ................................................................................ 80 

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10.2  Evaluation ........................................................................................................ 82 

ANNEX 1: PROCEDURAL INFORMATION ............................................................................................ 83 

ANNEX 2: STAKEHOLDER CONSULTATION ....................................................................................... 85 

ANNEX 3: WHO IS AFFECTED AND HOW? ........................................................................................... 98 

ANNEX 4: ANALYTICAL METHODS .................................................................................................... 105 

ANNEX 5: SPECFICITIES OF DIGITAL BUSINESS MODELS IN RELATION TO TAXATION ...... 110 

ANNEX 6: DETAILED BASELINE SCENARIO ON RELEVANT POLICY INITIATIVES................. 118 

ANNEX  7: WHAT ARE THE CONSEQUENCES? ................................................................................. 131 

ANNEX 8: METHODOLGY BEHIND REVENUE ESTIMATES FOR THE INTERIM OPTIONS ...... 140 

ANNEX  9: PROPERTIES OF A DESTINATION-BASED CASH-FLOW TAX .................................... 143 

ANNEX  10: MACROECONOMIC IMPACT OF CHANGES IN THE CCCTB FORMULA ................. 145 

ANNEX  11: COMPATIBILITY OF PREFERRED INTERIM SOLUTION WITH EU LAW ................ 148 

ANNEX 12: INTERIM SOLUTION – HOW IT WOULD WORK IN PRACTICE .................................. 150 

ANNEX  13: WORK AT THE OECD ........................................................................................................ 157 

ANNEX  14: REFERENCES ...................................................................................................................... 158 

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1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

The  digital  single  market  is  one  of  the  10  political  priorities  of  the  European 
Commission. The digital single market strategy1 aims at opening up digital opportunities for 
people and businesses in a market of over 500 million EU consumers. Completing the digital 
single  market  could  contribute  up  to  EUR  415  billion  per  year to  Europe's  economy,  create 
jobs and transform our public services. In the 18 months following the adoption of the digital 
single market strategy, the European Commission delivered the announced proposals. In the 
mid-term review of the strategy2 it has updated its analysis and focused on the next series of 
challenges. Digital technologies are transforming our world and having an important impact 
on  taxation  systems.  They  help  to  improve  their  management,  offering  solutions  to  reduce 
administrative  burdens,  facilitate  collaboration  between  tax  authorities,  and  address  tax 
evasion. However, they also transform business models, putting pressure on taxation systems 
of EU Member States. 

To fully deliver on its potential, the digital single market needs a modern and stable tax 
framework  for  the  digital  economy.  This  framework  is  important  to  stimulate  innovation, 
tackle market fragmentation and allow all players to tap into the new market dynamics under 
fair and balanced conditions. It is essential to ensure tax certainty for business investment and 
to prevent new tax loopholes emerging in the single market.3   

Policy  makers  are  struggling  to  find  solutions  which  would  ensure  fair  and  effective 
taxation as the digital transformation of the economy accelerates. There are weaknesses in 
the international tax rules as they were originally designed in the 1920s for 'brick and mortar' 
businesses and have now become outdated. In particular, this has led to a misalignment of the 
place where value is created, notably in the case of user contributions, and the allocation of 
the taxing rights and ability to enforce taxation (Hallerstein, 2014).  

Being grounded in the concept of physical presence, the current corporate tax rules no 
longer  fit  the  modern  context,  where  online  trading  across  borders  with  no  physical 
presence  has  been  facilitated  and  where  businesses  rely  heavily  on  hard-to-value  intangible 
assets, where automation, user generated contents and data collection, analysis and treatment 
have  moved  from  being  auxiliary  to  being  core  activities  for  value  creation.  These  issues 
potentially impact all businesses. As a result, some businesses are present in some countries 
where  they  offer  services  to  consumers  and  conclude  contracts  with  them,  taking  full 
advantage of the infrastructure and legal framework available while they are not considered 
established  for  corporate  tax  purposes.  This  situation  tilts  the  playing  field  in  their  favour 
compared to established companies.  

1  COM(2015) 192. 
2  COM(2017) 228. 
3 The scope of this initiative is limited to tax issues arising in corporate taxation. Challenges in relation to the 
application of personal income taxes, especially of relevance for collaborative models, are not addressed in this 
framework.  They  are  notably  covered  in  the  June  2016  Communication  on  an  Agenda  for  the  Collaborative 
economy (COM(2016) 356 final. 

4 

 
 
                                                 
In  contrast,  the  VAT  system  is  effectively  being  adapted  to  the  digital  economy,  as 
announced in the Action Plan on VAT4 adopted in April 2016. Notably, the problem of digital 
companies  establishing  themselves  in  Member  States  with  low  VAT  rates,  or  digital 
companies not being established in the EU at all, is addressed by taxing sales in the Member 
State of the consumer rather than in the Member State where the supplier is established (i.e., 
the VAT system is evolving towards the 'destination principle').5  It is in the framework of this 
reform that the VAT proposal on e-commerce was adopted by finance ministers in December 
2017.6 

Since the start of its mandate, this Commission has taken action to ensure the principle 
that all businesses operating in the EU pay their taxes where profits are made and thus 
where  value  is  created.  This  principle  is  essential  for  a  fair  and  effective  taxation  in  the 
single  market,  and  it  can  only  be  enforced  through  common  and  coordinated  measures. 
Divergent  national  approaches  within  the  EU  can  fragment  the  single  market,  increase  tax 
uncertainty,  destabilise  the  level  playing  field  and  open  new  loopholes  for  tax  abuse.  As 
already identified in the Commission's report in May 2014,7 the international tax framework 
needs  to  be  reformed  so  that  it  effectively  captures  the  value  created  from  new  business 
models. As it has so far proved difficult to agree on solutions at global level (OECD, 2015a), 
the Commission has adopted a communication in September 2017 on "A fair and efficient tax 
system in  the EU  for the digital single market"8. The Communication  sets  out  an ambitious 
agenda for a common EU approach in the absence of adequate global progress, with the aim 
to ensure that the digital economy is taxed effectively and in a way that ensures fairness and 
supports growth.  

The growing challenge of ensuring that all actors in the digital economy are fairly taxed 
on  their  income  has  still  not  been  adequately  addressed,  primarily  due  to  a  lack  of 
international  consensus  and  the  multidimensional  nature  of  the  challenge.  The  OECD 
examined this issue in the context of its BEPS project. However, at the time it proved difficult 
to agree on structural solutions at global level, as is evident from the OECD report on BEPS 
Action 1 (OECD, 2015a). The OECD has published its interim report on the taxation of the 
digital economy and presented it to the G20 Finance Ministers at their meeting in March 2018 
(OECD, 2018). A final report is due in 2020, with a progress update in 2019. 

The current situation is clearly unsustainable in an increasingly globalised and digitally 
connected  world,  where  ever  more  activity  is  moving  into  the  digital  space.  Failure  to 
address this situation will lead to more opportunities for tax avoidance, less tax revenues for 
public  budgets,  negative  impact  on  social  fairness,  including  through  erosion  of  the  social 

4 COM(2016) 148 final.  
5 In the 2011 Communication on the Future of VAT (COM(2011) 851 final), the Commission outlined that the 
general principle of EU VAT law should be based on taxation taking place in the country where the good or the 
service  is  consumed  (the  destination  principle).  In  considering  the  Communication,  Council  in  May  2012 
broadly endorsed the destination principle as the way forward for a definitive VAT system in the EU (Council 
conclusions).  
6 Council Directive (EU) 2017/2455 (OJ L 348, 29.12.2017, p. 7–22).   
7 European Commission Expert Group on Taxation of the Digital Economy Report, May 2014. 
8 COM(2017) 547 final. 

5 

 
                                                 
budgets,  and  it  will  destabilise  the  level  playing  field  for  businesses.  This  puts  at  risk  EU 
competitiveness,  fair  taxation  and  the  sustainability  of  Member  States'  budgets.  In  its 
conclusions  of  5  December  2017,  the  ECOFIN  Council  looked  forward  to  appropriate 
Commission  proposals  by  early  2018,  taking  into  account  relevant  developments  in  the 
ongoing discussions at the OECD.  EU leaders committed to global change of taxation rules, 
to adapt their tax systems to ensure that digitally-generated profits in the European Union are 
taxed where the value is created.9 

The  OECD  is  continuing  its  work  on  finding  global  solutions  that  can  address  the 
challenges,  which  is  an  opportunity  for  the  EU  to  feed  its  work  into  this  process.  The 
Commission has followed closely the preparatory work at OECD level to ensure its approach 
is coordinated as much as possible. Indeed, there is a very broad agreement on the problem 
analysis and the most promising directions for solutions. As is clear from the interim report 
(OECD, 2018), work at the OECD through the Inclusive Framework10 will focus on finding 
consensus-based  solutions  by  2020.  Annex  13  explains  the  interaction  between  the 
Commission's initiative and the work of the OECD.  

The  priority  for  the  Commission  is  to  propose  a  meaningful,  comprehensive  solution, 
that can positively impact solutions at international level, against a baseline scenario in 
which  digitalisation  progresses  rapidly,  and  so  does  the  pressure  to  act.  The  impact 
assessment therefore concentrates on assessing comprehensive policy options and identifying 
a  preferred  solution  in  responding  to  core  objectives.  The  comprehensive  solutions  revolve 
around structural changes that address the root issue, aligning the way in which the right to 
tax and profits are allocated between jurisdictions with the new ways of value creation. The 
assessment  is  done  against  a  baseline  scenario,  in  which  the  CCCTB  and  other  relevant 
initiatives  underway,  such  as  the  recently  adopted  VAT  e-commerce  proposals,  will  be 
implemented. 

Arriving at a meaningful comprehensive solution can take time, but there is an urgent 
need to act. The urgency for an EU action lies in the immediate threat of unilateral actions 
from Member States that risks further fragmenting the single market while preventing the full 
roll-out  of  the  digital  single  market.  The  longer  it  takes  to  find  a  solution,  the  bigger  the 
pressure on individual Member States to act to ensure fair taxation and a more level playing 
field  among  businesses.  The  imperative  to  act  now  has  been  confirmed  by  the  different 
consultation  activities  that  the  Commission  has  carried  out  as  part  of  the  preparatory  works 
that  are  the  basis  for  this  impact  assessment  report.  From  the  462  respondents  to  the  open 
public  consultation,  82%  as  well  as  16  out  of  21  national  tax  administrations  agree  that 
"something  should  be  done  about  the  current  international  tax  rules  in  what  concerns  the 
digital economy".11 Therefore, unilateral initiatives are expected to spread. Since 2013, there 

9 ECOFIN Council conclusion, 'A' Item note 15175/17. 
10 The Inclusive Framework brings together about 110 jurisdictions to collaborate on the implementation of the 
OECD/G20 Base Erosion and Profit Shifting (BEPS) Package. 
11  Annex  2  presents  a  detailed  summary  of  the  results.  The  OECD  has  also  carried  out  a  public  consultation 
exercise recently between September and October 2017. A summary of the main results can be found in Annex 2 
to this report. 

6 

 
                                                 
is an accelerating trend of countries testing or planning to implement alternative approaches to 
ensure effective taxation of the digital economy (see section 9.1).  

There are clear risks of postponing EU action 

  There  is  a  risk  of  creating  additional  barriers  to  the  emergence  and  scaling-up  of 
new  businesses,  especially  start-ups.  The  digital  single  market  cannot  reach  its  full 
potential if young and innovative companies are held back by antiquated tax rules. 

  There  is  a  risk  of  quickly  losing  our  competitiveness  by  deterring  investment, 
innovation and growth by offering an uncertain, unstable, fragmented and outdated tax 
framework.    

  Moreover, there is a risk of missing the chance to realistically agree on a common 
response in the future. The more measures are already in place, the less likely are the 
chances to agree on a common approach. 

This is why the Commission believes that more immediate, interim measures should be 
considered.  Hence  this  impact  assessment  also  examines  interim  solutions  to  tackle  the 
problem. These solutions revolve around new taxes that are relatively easy to implement and 
can serve as a good proxy for the comprehensive solution until this is implemented. This is in 
line  with  the  Conclusions  of  the  5  December  2017  ECOFIN  Council,  which  invite  the 
Commission to assess such measures. 

This impact assessment concludes that the best comprehensive policy option centres on 
new permanent establishment rules capturing 'digital presence' and new rules for profit 
allocation to the permanent establishment taking into account the contribution of users 
to  the  value  creation  process.  These  would  be  implemented  within  the  EU  through  a 
Directive with a broad scope. All companies surpassing certain digital activity thresholds in a 
jurisdiction would trigger a (digital) permanent establishment in that jurisdiction. To make the 
current proposal for a Common Consolidated Corporate Tax Base (CCCTB) consistent with 
these  new  rules,  the  CCCTB  proposal  would  have  to  be  adapted  to  reflect  the  new  digital 
permanent  establishment  rules.  Its  apportionment  formula  would  also  be  adapted  by 
introducing a factor that reflects the importance of user contributions to value creation, in line 
with  the new principles for profit allocation. The new rules  laid down in  the Directive (and 
included  in  the  CCCTB)  would  apply  to  companies  that  are  tax  resident  in  EU  Member 
States. To deal with companies that have no tax presence anywhere in the EU, the Directive 
would be complemented by a Recommendation to Member States to update their double tax 
conventions in line with the new rules.   

For  the  time  period  until  implementation  of  the  comprehensive  solution,  the  preferred 
interim solution is a tax on gross revenue levied on digital activities relying strongly on 
user  contributions.  This  is  notably  the  case  for  revenue  from  services  related  to  online 
advertising and from multi-sided digital platforms, connecting different sides of the relevant 
market (these types of businesses are further explained in section 2.1.3). After implementation 
of the comprehensive solution, the interim tax on revenue should stop being applied.   

7 

 
2. PROBLEM DEFINITION 

The digitalisation of the global economy is happening fast and corporate taxation rules 
are  outdated.  Today's  rules  have  been  built  on  the  principle  that  profits  should  be  taxed 
where the value is created. However, they were largely conceived in the early 20th century. A 
vast majority of the respondents to the open public consultation (65%) as well as 13 out of 21 
national tax administrations surveyed agreed with this view that the current rules are not at all 
or only to a little extent adapted to the digital economy (see Annex 2 for more details). 

Figure (1): Problem tree 

Difficulty to tax/ 
opportunities 
for tax 
avoidance 

Lack of a 
level playing 
field and 
distortion of 
competition 

Less revenue for public 
budgets/negative impact 
on social fairness  

 Risk of 
internal 
market 
fragmentation 

Current tax rules 

Taxation based on physical presence 

Profit attribution based on analysis of 
traditional factors 

Drive towards the digital economy 

Increased user contribution to value creation 

Increased use of knowledge, data, intangible assets 

More complex and global value chains 

Data as new source of revenue 

1.1  What are the problem drivers? 

1.1.1  Current corporate tax rules 

In the vast majority of cases, the allocation of taxing rights between two countries is laid 
down in bilateral double tax treaties. The network of double tax treaties within the EU is 

8 

 
 
 
 
almost  complete.12  The  network  of  double  tax  conventions  with  the  most  relevant  third 
countries is also quite dense.13  These treaties lay down the rules of 'where to tax', i.e. what 
triggers a right to tax in a country, and 'how much to tax', i.e. how much of corporate income 
is  allocated  to  a  country.  Tax  residence  in  a  country  creates  a  right,  in  principle,  for  the 
residence country to tax worldwide income. Today's permanent establishment rules determine 
the threshold and type of activity that needs to be carried out in a country in order for a non-
resident business to be taxable in that country. Non-tax residents become liable to tax if they 
have  a  presence  that  amounts  to  a  permanent  establishment.14  In  cases  where  there  is  no 
double tax treaty, domestic rules on tax residence and permanent establishment apply, without 
a mechanism to ensure that double taxation or double non-taxation does not happen. 

The international corporate tax rules aim to tax profits where the value is created, but 
the  implementation  of  this  principle  in  the  current  international  tax  framework  was 
mainly  designed  for  the  traditional  economy.  Because  the  current  rules  on  permanent 
establishment  are  largely  based  on  having  a  physical  presence  and  treat  the  permanent 
establishment as if it was effectively a separate enterprise, these rules were clearly developed 
for the traditional economy. However, only profits attributed to the permanent establishment 
can be taxed. Today the profit of multinational groups that can be attributed to the subsidiaries 
and  permanent  establishments  in  various  countries  is  determined  by  transfer  pricing  rules, 
based on an analysis of the functions performed, the assets used and the risks assumed by the 
different  entities  within the  group.  These  transfer  pricing  rules,  too,  were  developed  mainly 
for the traditional economy.15  

Most double tax treaties of EU Member States have been negotiated on the basis of the  
OECD  Model  Double  Tax  Convention,  according  to  which  having  a  permanent 
establishment  requires  a  fixed  place  of  business.  Such  a  place  will  normally  encompass 
physical  premises,  facilities  and  installations  used  for  business  purposes.  This  could  also 
include  a  server,  but  it  needs  to  be  used  to  carry  out  core  business  activities,  and  not  only 
preparatory or auxiliary ones. Furthermore, to be 'fixed', the establishment requires a certain 
degree of permanence (often 6 months). Marketing alone, without corresponding sales taking 
place in the same location, will usually not be considered to be a core activity. The same is 
true for other activities common for the digital economy, such as data collection and analysis. 
Moreover,  some  specific  installations  have  traditionally  been  explicitly  exempt,  such  as  a 
warehouse for the storage and delivery of goods. When those characteristics are missing, the 
enterprise will be deemed not to have a permanent establishment, leaving the state where it is 

12 Only 4 bilateral situations are missing: Cyprus with Croatia and Luxemburg, and Denmark with France and 
Spain. 
13 All Member States have double tax treaties with China, India and Canada. Only one Member State (Croatia) 
does not have a treaty with the US. There are 6 Member States that have no treaty with Japan. 
14  To  avoid  that  a  company  has  to  pay  tax  on  the  same  income  both  in  the  country  of  the  permanent 
establishment  and  in  the  country  of  tax  residence,  double  tax  conventions  lay  down  rules  to  relieve  double 
taxation in the form of an exemption of foreign income or a tax credit for taxes paid abroad. 
15  Section  2.2  of  the  OECD  Action  1  report  (OECD,  2015a)  contains  a  comprehensive  and  more  detailed 
explanation of today's corporate tax rules and their origins.  

9 

 
                                                 
active  without  a  taxing  right.  It  also  results  in  tax  loopholes  as  explained  in  section  2.2.1 
below.  

The  transfer  pricing  guidelines  based  on  the  OECD  Model  Double  Tax  Convention 
follow the 'arm's length principle' to determine the price for transactions that take place 
between  companies  in  the  same  multinational  group.  Member  States  generally  use  these 
rules/guidelines as a benchmark for the double tax treaties. Specifically, transactions that take 
place  between  associated  enterprises  are  analysed  as  if  they  had  taken  place  between 
independent  enterprises  to  ensure  that  they  reflect  market  forces  and  not  be  used  to  shift 
profits for tax purposes. Profits accruing to an associated enterprise in a multinational group 
should reflect the functions performed, assets used and risks assumed by that enterprise. 

1.1.2  Drive towards the digital economy 

The  digitalisation  of  the  global  economy  is  happening  fast  and  permeates  almost  all 
areas of society. Although the size of the 'digital economy' is still relatively small - estimates 
revolve  around  4-5%  of  value  added  (see  footnote  42)  -  businesses  of  all  kinds  now  derive 
much  of  their  value  from  intangible  assets,  information  and  data.  As  a  result,  the  digital 
economy  displays  a  very  strong  growth  path.  Close  to  a  third  of  the  growth  of  Europe's 
overall industrial output is already due to the uptake of digital technologies.16 In 2006, only 
one digital company was among the top 20 firms by market capitalisation whereas in 2017, 
already  9  digital  companies  were  among  the  top  20.17  Between  2008  and  2016,  the  annual 
average growth of revenues of the top 5 e-commerce retailers amounted to a staggering 32%, 
compared  to  only  1%  in  the  whole  EU  retail  sector.  Between  2006  and  2016,  digital 
advertising revenue in Europe has multiplied by more than 5.18  

is  no  well-defined  digital  sector  as  such.  Notably, 

There 
the  Information  and 
Communication Technology (ICT) sector is no synonym for the digital economy. Rather, one 
might consider the ICT sector as the backbone of the digital economy (and important driver 
for  the  digitalisation  of  more  traditional  industries).  The  ICT  sector  comprises  both 
manufacturing  activities  and  services,  though  services  represent  more  than  90%  of  the  total 
production.  Computer  and  related  activities  is  by  far  the  largest  sub-sector,  followed  by 
Telecommunications  (Figure  1  in  Annex  5)  provides  a  breakdown  by  Member  State).  ICT 

16 This is accompanied by a larger background process of creating value by adding services to products or by 
replacing a product with  a service, which is known in in economic  literature as 'servitisation' of products. For 
details, see Vandermerwe, S. and Rada, J. (1988). Moreover, according to World Bank data, over the past two 
decades,  the  value  added  of  the  services  sector  in  general  (in  terms  of  relative  weight  in  GDP)  has  increased 
from about 58% in 1995 to 69% in 2015 (https://data.worldbank.org/indicator/NV.SRV.TETC.ZS).  
17 In this comparison, a company is considered 'digital' if it belongs to the sectors: technology, consumer services 
(e-commerce)  or  telecommunications.  In  this  sense,  in  2006  the  only  digital  company  was  Microsoft  and  in 
2017, the 9 digital companies were: Apple Inc, Alphabet Inc-Cl A, Microsoft Corp, Amazon.com Inc, Facebook 
Inc-A, Tencent Holdings Ltd, Alibaba Group Holding-Sp Adr, AT&T Inc and China Mobile Ltd.  
18 IAB Europe and IHS Markit (2017); IAB and IHS establish figures on online advertising spending in Europe 
based  on  data  received  from  27  European  countries,  of  which  21  are  members  of  the  European  Union  (EU 
countries  missing  are  Cyprus,  Estonia,  Latvia,  Lithuania,  Luxembourg,  Malta  and  Portugal  and  non-EU 
countries included are Belarus, Norway, Russia, Serbia, Switzerland and Turkey). 

10 

 
                                                 
services are also growing at much faster rates than the ICT manufacturing sector (European 
Commission, 2017b).  

Digital  companies  should  not  be  considered  pre-dominantly  as  ICT  companies.  Many 
companies commonly considered as digital companies do not belong to the ICT sector.  The 
2017 World Investment Report (UNCTAD, 2017a and 2017b) has developed a methodology 
to classify international companies into (1) digital companies, (2) IT and telecoms companies 
(both enablers of the global digital economy) and (3) 'other multinational companies'. IT and 
telecoms  companies  are  broadly  equivalent  to  the  ICT  sector.  They  are  either  IT  hardware 
manufacturers  or  software  developers/providers  of  IT  services,  or  they  are  providers  of 
telecommunication infrastructure and connectivity. Digital companies are characterised by the 
nature  of  their  operations,  which  are  strongly  linked  to  the  internet.  The  report  further 
distinguishes  between  providers  of  internet  platforms,  e-commerce,  digital  solutions  and 
digital content.  

Focussing on the top companies in each category clearly shows the much more dynamic 
revenue growth in the digital sector. Based on a unique assignment of companies into one 
of the categories, UNCTAD (2017b) has produced new lists of top 100 multinationals in the 
categories 'IT and telecoms' and 'digital'.19 Table (1) reports summary statistics for the largest 
companies  in  each  category.  Average  revenue  growth  was  around  14%  for  the  top  digital 
firms,  compared  to  around  3%  for  IT  and  telecom  enterprises  and  0.2%  for  other 
multinational  enterprises,  although  total  revenue  by  the  largest  digital  companies  is  still 
considerably  lower  than  that  of  the  other  sectors.  The  table  also  reports  the  'international 
footprint' and the relevance of intangible assets, discussed in the next subsection. 

Table (1): Revenue growth, international footprint and relevance of intangible assets of 
largest multinational companies 

872 
2825 
5682 

International 
footprint 

Type of MNE  Total revenue 

Relevance of 
intangible assets 

Digital 
IT&Telecoms 
Other 

Annual 
revenue 
growth 
14.2% 
3.1% 
0.2% 
Source: Own computations based on UNCTAD (2017a and 2017b) and Bureau van Dijk Orbis database. 
Notes: Total revenue for the latest available year for the top companies in each category in $ billion. 'Digital' 
and 'IT&Telecoms' each consist of 100 companies. The category 'Other' only includes 83 companies, since some 
of the companies on UNCTAD's usual list of top 100 global companies belong to the first two categories. Annual 
average growth is measured over the latest 7 available years. International footprint is the ratio of the share of 
foreign  sales  in  total  sales  to  the  share  of  foreign  assets  in  total  assets.  The  relevance  of  intangible  assets  is 
computed as the market capitalisation over equity book value minus 1. 

2.1 
2.2 
1.1 

3.1 
1.2 
1.4 

19  As  the  focus  in  UNCTAD  (2017b)  is  on  international  investment,  only  companies  which  exceed  a  certain 
threshold of international activity are considered. Furthermore, the companies need to report certain information 
in their publicly available financial accounts. 

11 

 
  
                                                 
1.1.3 

 Specificities of digital business models in relation to taxation 

The main characteristics of digital business models - as compared to more traditional ones - 
are their ability to conduct activities remotely, the contribution of internet users in their value 
creation, the importance of intangible assets and a tendency to winner-takes-most dynamics. 

(a) Limited physical presence 

Businesses in the digital economy can easily conduct activity remotely and are therefore 
very active in cross-border trade. Little physical presence is required to sell into a market. 
From one  click on the computer,  consumers can  order goods and services  from all  over the 
world, translating into new market reach.  For digital services more specifically, this is even 
more  acute  as  the  delivery  of  the  service  itself  requires  no  or  little  physical  presence.  Such 
activities used to be mostly conducted locally in the destination location, and are now more 
and  more  conducted  remotely  in  the  country  of  origin  (at  source),  although  increasingly 
relying  on  consumer 
the  destination  country.  One  observes  a 
disintermediation process – also referred as a 'scale without mass' business structure.  

information  from 

As  a  result,  businesses  of  the  digital  economy  have  a  fundamentally  different 
international  footprint,  with  far  fewer  assets  in  the  location  of  their  foreign  sales.  One 
way  to  measure  this  phenomenon  is  by  measuring  the share  of  foreign  assets  in  total  assets 
against the share of foreign sales in total sales. 

International footprint = (foreign sales/total sales)/(foreign assets/total assets) 

Doing  so  for  the  three  categories  of  largest  global  companies  (see  Table  (1)  above)  shows 
that,  compared  to  the  traditional  non-IT  companies,  digital  companies,  have  a  much  larger 
share  of  sales  earned  outside  their  home  country  relative  to  the  assets  they  hold  abroad. 
UNCTAD  (2017a)  provides  a  more  detailed  breakdown  which  helps  arriving  at  a  clearer 
picture.  As  displayed  in  Figure  2  of  Annex  5,  the  international  footprint  is  particularly 
striking,  with  values  exceeding  2.0,  for  internet  platforms  (search,  social  networks  or  other 
platforms),  electronic  payment  companies  and  companies  classified  as  'other  e-commerce', 
which  includes  for  example  major  travel  platforms.  In  contrast,  telecom  companies, 
traditional businesses and online retailers, but also providers of digital media have a balanced 
ratio of around 1.  

(b) Disruption in value creation and indirect revenue generation 

The relevance of user contributions is central, materialising through the mass of adopters, 
the provision of personal data and other forms of user contributions to the production process. 
Participating in a platform or a network creates a value. As opposed to the conventional 'value 
chain'  business  model  where  value  is  generated  by  the  supplier  of  a  product  or  a  service,  a 
large part of the value derived by users of an online platform is created by other users. This is 
particularly  true  for  multi-sided  platforms.  The  positive  effects  that  one  user  of  a  good  or 

12 

 
service  has  on  their  value  to  other  users  are  known  as  'network  effects'20,  meaning  that  the 
marginal benefit of adopting the service increases with the number of users. 

The  concept  of  'prosumers'  is  emerging  where  end-users  participate  in  the  value 
creation.21  The  end-user  is  no  longer  solely  a  consumer  but  contributes,  either  actively  or 
passively,  to  the  value  creation.22  The  consumer  may  receive  services  for  free,  but  also 
provides data that are valuable for a company or contributes more actively to the service, for 
example by uploading content. This is a phenomenon that Colin (2013) associates to a form of 
work without monetised compensation (obvious examples are Google or Facebook to  which 
access is free but all activities, searches, interactions that reveal interests and preferences are 
recorded and can used to create value). Petruzzi and Buriak (2017) also refer to 'unconscious 
contributor' or 'unconscious employees'. This creates challenges in determining where and by 
whom value is created. 

Often  digital  businesses  provide  one  type  of  products  for  free  and  monetise  others, 
creating  a  disconnection  between  revenues  generated  and  services  provided.  Revenue 
generation  in  the  digital  economy  derives  from  both  direct  payments  (subscription  or 
transaction  fees)  and  indirect  payments  through  the  generation  of  value in  one activity (e.g. 
social media, search engines) that is later monetised as input for another activity (e.g. sales of 
advertising  space  or  transmission  of  data).  The  generation  of  income  via  advertisements 
arguably replicates the selling of advertisement space on television or radio. What does make 
a  difference,  however,  is  the  unique,  almost  personalised  manner  in  which  advertising 
placements  track  the  user  –  by  responding  directly  to  their  search-engine  searches  or  direct 
clicks  on  advertisements  (Commission  Expert  Group  on  Taxation  of  the  Digital  Economy, 
2014).  Taken  together  the  disconnection  between  the  consumers  of  advertisements  and  the 
advertising  companies  and  the  fact  that  user  data  are  central  to  the  personalisation  of 
advertisements result in a particularly stark deviation from the principle of taxation where the 
value is created. 

(c) Importance of intangible assets 

One key feature of intangible assets is that they are difficult to value reliably, while they 
are the essence of a competitive advantage in some businesses. When generated internally, 
generally  accounting  principles  including  international  accounting  standards  prohibit  the 
recognition of those assets, even though they are a core component of a business model. As a 
consequence,  they  do  not  appear  on  a  company's  balance  sheet  until  such  assets  are  either 
acquired or otherwise transferred to a third party for a consideration (e.g. through a business 

20  See  Commission  Staff  Working  Document  on  Online  Platforms,  accompanying 
"Communication on Online Platforms and the Digital Single market" (COM(2016) 288) 
21 The term was first coined by futurist Alvin Toffler in his work Future Shock (1970) and later developed in its 
sequel, The Third Wave (1980). 
22 For example, network effects will be particularly relevant marketplaces multi-sided platforms) or social media 
that  connect  users.  Reliance  on  big  data  is  very  strong  for  social  media,  internet  search  services  and  online 
advertising platforms while it is moderate for cloud services. 

the  document 

13 

 
                                                 
combination), in which case the financial statements of the acquiring company must generally 
recognise these assets for their fair value.  

There  is  evidence  that  intangible  assets  are  particularly  important  for  companies  with 
significant  digital  activities.  Markets  tend  to  attribute  their  own  value  to  assets,  whether 
recognised or not. Therefore, as a proxy, differences in the importance of intangible assets can 
be derived by comparing differences between a company's equity book value and its market 
valuation (UNCTAD, 2017a).  The increasing importance of intangible assets is shown by a 
widening gap between book and market values of companies. Undisclosed intangibles of the 
largest  digital  multinationals  are  estimated  to  be  on  average  roughly  equal  to  3  times  the 
company's  total  equity  book  value  –  significantly  more  than  the  average  recorded  for  IT  & 
telecom companies and other multinational enterprises (see Table 1 above). At the same time, 
the excess in market capitalisation over equity book values are of course also an indication of 
the market expectations about future revenue generation.  

(d) Winner takes most dynamics 

Digital markets are often dominated by a few 'superstar' firms. Today's big players of the 
digital  economy  are  fairly  young  companies  that  have  created  new  markets  and  quickly 
become global, dominant players. Common characteristics related to this phenomenon include 
the  volatility  in  the  market  (the  rapid  gaining  and  losing  of  market  share),  the  tendency 
towards monopoly and oligopoly and the relevance of user contributions to the success of the 
business model (OECD, 2015a). Although modern technologies, such as the internet, software 
and cloud services, make it possible to enter markets at minimal costs and as such threaten a 
dominant position (Evans and Schmalensee, 2016), digitalisation and globalisation contribute 
to  a  trend  of  'winner  takes  most'  markets  that  are  dominated  by  a  few  'superstar'  firms 
(Veugelers,  2017).    For  digital  markets  this  has  to  do  with  the  relevance  of  large  fixed 
investments,  combined  with  low  marginal  costs  (once  developed  digital  goods  can  be 
reproduced at almost no cost), network and lock-in effects.23 These are strong forces bringing 
about increasingly concentrated markets.24  

Based  on  the  above  discussion,  some  digital  business  models  stand  out  in  particular. 
There  is  no  unique  or  best  way  to  categorise  business  models.  Box  (1)  identifies  four 
categories based on the nature of activities, how revenues are generated and what this implies 
for taxation in the locations where activities take place. Often, companies are hybrid and mix 
the business models identified below. 

23 See for example Shapiro and Varian (1998). Moreover, the literature on barriers to market entry recognises the 
type of lock-in effects that networks can entail as a possible switching barrier, which is one form of a barrier to 
market  entry.  Similarly,  low  taxes,  giving  a  cost  advantage  to  the  incumbent  firm,  are  one  form  of  a  market 
barrier. A review of the literature on market barriers and a classification of different forms of barriers is provided 
in McAfee et al. (2003). 
24  Capacity  limits,  product  differentiation  and  potential  for  multi-homing  (i.e.  the  possibility  to  be  active  on 
several similar platforms) however can limit the level of concentration (Haucap and Heimeshoff, 2014). 

14 

 
 
                                                 
Box (1): Business models in the digital economy 

1. The digital platform model granting access to a marketplace 
This  business  model  offers  a  marketplace  for  users  of  the  platform,  which  acts  as  an 
intermediary. The model typically covers two services: (i) the platform offers access to 
users in  exchange  for  a fee  (transaction-based  or  subscription);  and  (ii)  the  users  offer 
services or goods among themselves.  

This model connects demand and supply: this can be spare capacity and demand in the 
case  of  collaborative  platforms;  it  uses  reputational  currency  mechanisms  to  underpin 
consumption; and in some cases it enables individuals to share 'access' to assets rather 
than  exchanging  them  outright.  Revenue  models  vary  significantly  among  platforms. 
Most adopt a fixed or variable commission-based approach, with commissions ranging 
from 1-2% within peer-to-peer lending to up to 20% for ride-sharing services. The value 
is  derived  from  marketing,  brands,  collection  and  exploitation  of  user  data  needed  for 
the matching of users and developments in software to enable better this user matching.  

2. The advertising model 
The model typically covers two services: (i) a platform offers access to a service that can 
be  a  social  network,  a  search  engine,  a  content  etc.  to  users  for  free,  in  exchange  of 
personal  data;  and  (ii)  personal  data  obtained  from  such  users  is  used  to  sell  targeted 
advertisement  placements  or  it  is  sold,  either  to  advertising  companies  or  to  others 
businesses.  

The model relies on advertising revenues by targeting marketing messages to consumers 
or selling user data to business developers. The extent to which platform users have to 
provide personal data in exchange of an access to a service varies significantly from one 
activity  or  company  to  another  as  well  as  the  degree  of  users'  awareness  and  level  of 
involvement  (passive  versus  active  participation)  in  giving  away  personal  data.  More 
and personalised user data enables better targeting of marketing messages and increases 
the  value  of  the  advertisement  medium.  This  value  is  difficult  to  measure  for  tax 
purposes.  The  specificity  of  such  revenue  model  is  that  it  disconnects  users  from  the 
revenue sources. 

3. The digital platform model granting access to content/solutions 
The  model  covers  typically  one  service:  the  platform  offers  users  access  to  a  platform 
and to content or solutions in exchange for a (subscription) fee.  

This model covers a diverse set of digital activities, including online media, streaming 
and broadcasting of digital content, gaming activities, the provision of digital solutions 
such as e-payment services or cloud computing. The business either provides access to 
digital contents such as music, videos or e-books that were traditionally connected to a 
physical  product  (for  example,  a  DvD  or  a  book)  and  charges  a  (subscription)  fee  for 
(continued) access. In cases where the services is provided for free and financed through 
the  sale  of  targeted  advertisement  placements  or  the  sale  of  data,  the  activity  is 
considered to fall under business model 2 above. Or it offers a solution, such as cloud 
computing services or provision of software. The service provided is fully digitalised. In 
the  business-to-consumer  segment,  the  provision  of  the  service  often  does  not  require 
any physical presence in the location, i.e. the market can be served fully remotely. For 
digital  solutions  in  the  business-to-business  sector,  the  service  is  often  highly 
customised and therefore tends to require more physical presence at the location of the 

15 

 
  
 
 
consumer.  

4. The distant sales model/e-commerce 
This  model  equates  to  online  retail  activities.  Goods  are  sold  via  a  website,  and 
physically transferred afterwards. Revenues are generated from the sales of goods. 

1.2  What are the consequences? 

1.2.1  Difficulty to tax/opportunities for tax avoidance 

(a) Misalignment of value creation and taxes 

For  globally  active  companies  that  do  not  require  physical  presence  to  gather  and 
process data there is a strong misalignment between value creation and taxation.25 The 
use  of  intangibles  and  of  data  knowledge  (including  consumer  data)  and  other  user 
contributions to improve  or develop products and services or to define marketing, sales and 
pricing policies has increased considerably, although it is not a new phenomenon. It does not 
raise tax issues as long as a company's activities are pre-dominantly domestic, in which case 
all value creation would also be 'domestically' captured for taxing purposes. However, it does 
raise an  issue  in  a  global  context.  The  current  permanent  establishment  and  transfer  pricing 
rules that address the questions 'where to tax' and 'how much to tax' do not take into account 
the user contribution in the allocation of taxable profits, which results in a mismatch with the 
value creation. The views of stakeholders have been tested on this topic: 67% of respondents 
to the open public consultation as well as 15 out of 21 national tax authorities agree with the 
statement  that  "states  are  not  able  to  collect  taxes  on  the  value  that  some  digital  companies 
create on their territory".    

 (b) Artificial avoidance of permanent establishment rules 

Since the current permanent establishment rules are grounded in physical presence and 
traditional core activities, they can be easily circumvented for certain  digital activities. 
Even sizeable digital activities in a location do not always result in a permanent establishment 
in  that  location  (see  Section  2.1.1).  Moreover,  it  is  often  fairly  easy  for  digital  economy 
businesses to find arrangements that circumvent the existence of a permanent establishment. 
Avoidance  of  a  permanent  establishment  happens  in  practice  through  (i)  the  use  of 
commissionaire arrangements and (ii) the treatment of some critical functions as preparatory 
or auxiliary. Through commissionaire arrangements a person sells products in a country in its 
own name but on behalf of a foreign enterprise that owns these products. Other arrangements 
involve contracts that are substantially negotiated in one state but are finalised or authorised 
abroad,  or  where  the  person  who  concludes  contracts  is  an  'independent  agent'  to  whom 
exceptions are available. Moreover, businesses have been able to avoid creating a permanent 

25 That is, the phenomenon of disintermediation due to a process of dematerialisation in the business model of 
digitalised firms. 

16 

 
 
 
 
                                                 
establishment  by  categorising  their  business  activity  as  qualifying  for  one  of  the  'specific 
activity  exemptions'  according  to  which  a  permanent  establishment  is  deemed  not  to  exist 
where a place of business is only used to carry out the activities listed in that paragraph. One 
example is the use of a storage facility solely for the delivery of goods to customers. Another 
possibility to trigger exemptions is by breaking up into smaller operations to claim that each 
part is merely engaged in preparatory or auxiliary activities. A more detailed discussion on the 
artificial avoidance of permanent establishment rules is provided in Annex 7. 

(c) Shifting profits through transfer of intangible assets 

Even where there is a permanent establishment, tax can be avoided by shifting mobile 
intangible  assets  to  low  tax  jurisdictions.  Not  only  can  intangible  assets  be  shifted  fairly 
easily from one jurisdiction to another, but they also are difficult to value. In the absence of 
rules  that  are  robust  against  abuse,  this  opens  significant  opportunities  for  aggressive  tax 
planning,  which  allow  more  digitalised  companies  to  benefit  from  certain  tax  regimes  and 
push  down  their  tax  burden.  This  is  done  via  intra-group  payments  (royalties)  for  which  an 
objective  transfer  price  is  difficult  to  determine.    Profits  allocation  rules  follow  contractual 
arrangements  of  transactions  between  intragroup  companies.  Indeed,  legal  ownership  of 
intangibles is a decisive factor for determining profits, resulting in entities with little business 
activity potentially benefitting from high profit allocation (Olbert and Spengel, 2017).   

A  detailed  examination  of  tax  rules  confirms  the  profit  shifting  opportunities 
multinational enterprises with sizeable intangible assets have. Out of seven important tax 
planning  structures  identified  by  Ramboll  Management  Consulting  and  Corit  Advisory 
(2015),  three  involve  the  use  of  intellectual  property.  The  same  study  determines  the 
prevalence across Member States of tax rules that are necessary or conducive for the set-up of 
aggressive tax planning schemes. It identifies 15 Member States whose tax frameworks have 
elements  that  directly  promote  or  prompt  an  aggressive  tax  planning  structure.  All  but  two 
Member  States  show  a  lack  of  anti-abuse  rules.  ZEW  (2016)  estimates  the  impact  of 
aggressive  cross-border  tax  planning  schemes  on  the  effective  average  tax  rates.  It  shows 
without ambiguity that placing intellectual property in a country with a generous intellectual 
property box allows lowering the effective average tax rate significantly - and more than any 
other tax planning structure.  

Econometric studies evidence the importance of the location of intangibles, and notably 
intellectual  property,  in  profit  shifting  strategies.  Dischinger  and  Riedel  (2011)  find  that 
for  European  multinational  enterprises  a  one  percentage  point  increase  in  corporate  income 
tax rate reduces intangible assets in the balance sheet by about 1.7%.  Several contributions 
evidence more generally the significant effect of corporate taxation on the number of patent 
applications and relocations (Karkinsky and Riedel, 2012, Böhm et al., 2012, Griffith et al., 
2014, Alstadtsaeter et al., 2018). More evidence on this is summarised in Annex 7. 

The views of stakeholders have been tested on this topic as well: 73% of respondents to the 
open  public  consultation  as  well  as  14  out  of  21  national  tax  authorities  agree  with  the 
statement that "the current international taxation rules allow digital companies to benefit from 
certain tax regimes and push down their tax contributions".    

17 

 
1.2.2  Lack of a level playing field and distortion of competition 

Digital  businesses  models  in  the  EU  face  a  lower  effective  average  tax  burden  than 
traditional business models. Based on stylised business models, ZEW et al. (2017) finds that 
a cross-border digital business model is subject to an effective average tax rate of only 9.5%. 
This compares to a rate of 23.2% of a cross-border traditional business. To a certain extent, 
the lower tax levels simply reflect that modern tax policy recognises the importance of R&D 
and digitalisation for future growth and prosperity, as is also reflected in the CCCTB proposal 
which includes an allowance for R&D expenses.26 However, beneficial regimes targeting very 
mobile  assets  also  indicate  that  countries  compete  fiercely  on  this  very  mobile  segment. 
Through  aggressive  tax  planning,  for  example  by  placing  intellectual  property  in  an 
intermediary  company  located in  an  EU  country  with  an  attractive  intellectual  property  box 
regime, companies can achieve effective average tax rate levels of zero and below, i.e. their 
activity is effectively subsidised (ZEW, 2016). Table (2) reports effective average tax rates for 
different business models and type of companies.  

Table (2): Effective average tax rates of different model companies 

Domestic 
company 

Multinational 
group 

Multinational  group  engaged  in 
aggressive  tax  planning  using 
most beneficial IP box regime 

business 

Traditional 
model 
Digital business model 

20.9 

8.5 

23.2 

9.5 

16.2 

-2.3 

Source: Own computations based on ZEW (2016, 2017) and ZEW et al.  (2017). 
Notes: 1/ Aggressive tax planning by the multinational group is assumed to be done though exploitation of the 
most beneficial intellectual property regime available in the EU. 2/ For the multinational groups, cross-border 
investments  within  the  EU  and  with  certain  third  countries  (notably:  US,  Canada,  Japan,  Norway  and 
Switzerland) are considered. 3/ The 9.5% for the multinational group with a digital business model is an average 
of 8.9% for a business-to-business model and 10.1% for a business-to-consumer model. 

A  lower  tax  burden  for  digital  businesses  can  result  in  competitive  distortions  that 
contribute to a lack of a level playing field between different types of companies. Some 
evidence  exists,  suggesting  that  tax  planning  can  result  in  higher  mark-ups  and  competitive 
advantages  (see  Annex  7).  This  is  not  only  true  between  those  companies  that  are  more 
digitalised and those that are less, but also between digital companies that pay tax in a given 
Member State and those that serve the same market remotely or minimise payments through 
aggressive tax planning. A lack of a level playing field also occurs across the single market, 
as some Member States feature more prominently in tax planning schemes than others. In the 
worst case, a significantly lower tax burden enables larger digitalised companies to drive out 

26 Three factors explain the difference in effective average tax rates. Expenses for the creation of software and 
other intangible goods, which play a much bigger role for digital businesses, are often immediately deductible 
whereas  physical  assets  used  in  the  traditional  business  model  are  depreciated  over  time.  Businesses  active  in 
digital  activities  typically  spend  relatively  more  on  R&D  activities,  for  which  many  countries  apply  tax 
incentives. Finally, an important number of countries offer lower tax rates for earnings derived from intellectual 
property ('intellectual property boxes'). 

18 

 
  
                                                 
market  competitors  or  hinder  potential  entrants.    This  is  economically  inefficient  and  hurts 
innovation, growth and welfare. 

Both  the  national  tax  authorities  as  well  as  the  wider  public  that  responded  to  the  public 
consultation have confirmed that the competition between traditional and digital businesses is 
not  an  equal  one.  13  out  of  21  national  tax  authorities  and  65%  of  the  respondents  to  the 
public  consultation  agree  that  "the  current  international  taxation  rules  do  not  allow  for  fair 
competition between traditional and digital companies".   

1.2.3  Less revenue for public budgets/negative impact on social fairness 

Lower  (or  even  no)  taxes  paid  on  profits  from  digital  activities  puts  at  risk  the 
sustainability  of  public  finances.  It  results  in  unfair  burden  sharing  across  taxpayers, 
constraints  the  financing  of  our  social  models  and  ultimately  weakens  our  social  contract. 
Although it is difficult to isolate the share of digital activities, the tax revenue shortfalls from 
aggressive tax planning activities cost billions of euros every year. It has been estimated in a 
study for the European Parliament that within the EU the corporate tax revenue losses amount 
to  about  EUR  50-70  billion  (Dover et  al.,  2015).27  This  is  equivalent  to  the  lower  bound  to 
around 0.4% of GDP. Governments of countries, whose tax bases are eroded, either have to 
raise  revenue  from  other  taxes  or  have  less  revenues  for  growth-enhancing  reforms  and  for 
redistribution  purposes  to  fight  inequalities.  Recent  new  estimates  by  Tørsløv  et  al.  (2017) 
show that the aggregated loss to tax havens for Germany, France, Italy and Spain would reach 
over EUR 40 billion per year (see Figure 4 in Annex 7).  

The  perception  of  the  social  fairness  of  the  tax  system  suffers  if  companies  do  not 
contribute their 'fair share' to budgets. Digital businesses conducting sizeable activities in 
a  jurisdiction  will  usually  also  benefit  from  the  public  infrastructure  offered  by  that 
jurisdiction.  For  mostly  'web-based'  companies,  this  will  include  the  physical  internet 
infrastructure, rule of law and judiciary in the country, but also the education and digital skills 
of potential users. Within the single market, all companies with cross-border activities benefit 
from  the  fundamental  freedoms.  Therefore,  a  non-contribution  to  public  budgets  is  seen  as 
inherently  unfair  by  many  and  can  undermine  taxpayer  morale.  This  perception  is  widely 
shared  by  both  the  national  tax  administrations  as  well  as  the  respondents  to  the  public 
consultations. 14 out of 21 tax administrations as well as 67% of respondent agree that "social 
fairness is impacted because some digital companies do not pay their fair share of taxes".     

1.2.4  Risk of further single market fragmentation 

An  uncoordinated  implementation  of  national  measures  adds  distortions  to  the 
functioning of the single market, also contributing to business uncertainty on the future 
tax  framework.  The  introduction  of  country-specific  tax  regimes  leads  to  distortions  of 
competition,  high  tax  compliance  costs  and  may  result  in  double  taxation  of  digitalised 
companies  that  supply  cross-border  services  in  the  single  market.  This  hurts  the 

27 Their methodology assumes that national deviations from the average corporate tax to gross operating surplus 
of companies ratio are due to tax avoidance. 

19 

 
                                                 
competitiveness  of  the  EU  as  a  whole  and  adds  uncertainty.  Moreover,  a  patchwork  of 
national measures generates new incentives and opportunities for tax arbitrage. Some Member 
States already have in place targeted regimes, in the areas of both direct and indirect taxation, 
others  are  planning  such  taxes.    Section  9.1.,  9.3.1  and  Table  (1)  in  Annex  6  provide  an 
overview of relevant national taxes/initiatives.     

3. WHY SHOULD THE EU ACT? 

1.3  Legal basis 

As the nature of this legislative proposal is twofold, encompassing a comprehensive solution 
and an interim solution with slightly different objectives each, the two measures are justified 
on different legal grounds.   

The  legal  basis  for  the  comprehensive  solution  is  Article 115  of  the  TFEU.  The 
comprehensive solution aims at introducing a comprehensive and modern framework for the 
taxation of the digital economy to address structurally the root-cause of the issue and improve 
the functioning of the single market. It would change the way the taxable nexus is established 
and  profit  is  allocated  to  the  taxable  nexus.  This  approach  could  also  be  integrated  into  the 
Common Consolidated Corporate Tax Base (CCCTB) to provide for a comprehensive reform 
of the corporate income tax system and improve the functioning of the single market.  

The legal basis for the interim solution is Article 113 of  the TFEU. The interim solution 
aims at ensuring that an immediate and harmonised response at EU level is provided to some 
of  the  identified  problems.  Additional  fragmentation  and  distortions  of  competition  could 
arise  if  unilateral  actions  were  implemented  by  Member  States  before  a  comprehensive 
solution  can  be  agreed.  This  requires  the  creation  of  a  harmonised  legislative  framework 
within the EU concerning a new tax on digital  activities. Given its (preferred)  features, this 
tax would have more elements of an indirect tax, so it would need to be treated as an indirect 
tax other than turnover taxes and excise duties.   

1.4  Subsidiarity: Necessity of EU action 

A common and coordinated action at EU level is the only one with real chances to tackle 
the  existing  problems,  rooted  in  the  existing  international  tax  framework,  in  a 
comprehensive  and  efficient  way.  This  is  because  the  problems  posed  by  the  current 
corporate  tax  framework  not  keeping  pace  with  the  digital  sector  are  not  particular  to  a 
specific Member State, but constitute a common challenge for the EU as a whole. In fact, such 
problems  are  of  an  international  dimension  because  one  of  the  key  aspects  of  digital 
businesses is that they can easily conduct activity remotely and are very active in cross-border 
trade.  

As  regards  the  comprehensive  solution,  only  an  EU  answer  to  the  challenges  posed  by 
the digital economy to the corporate tax framework would be coherent with the efforts 

20 

 
 
 
already made to subject taxpayers to a single set of corporate tax rules across the EU. 
Although at present the corporate taxation framework is only to a limited extent harmonised 
at EU level, there are relevant proposals adopted by the Commission currently on the table of 
the European Council (CCTB and CCCTB). They aim to facilitate business within the EU by 
subjecting taxpayers to a single rulebook of corporate tax legislation across the single market 
and  also  make  the  system  more  robust  and  resilient  to  aggressive  tax  planning.  From  that 
perspective,  uncoordinated  action  targeting  the  digital  sector  would  undermine  the  existing 
work at EU level on the wider corporate taxation rules.  

EU action is  also  necessary to  mitigate the  fragmentation of  the  single market  and the 
creation  of  distortions  of  competition  within  the  EU  due  to  interim  unilateral  actions 
adopted  by  Member  States  while  awaiting  the  adoption  of  a  comprehensive  solution. 
Common and coordinated action at EU level to reform the corporate tax framework so as to 
better  reflect  the  digital  activities  of  companies  may  take  some  time  to  agree  so  there  is  a 
further case for common action at EU level in the interim  period to  avoid  distortions to  the 
single market from unilateral actions by Member States. Several Member States have already 
introduced, and others have announced their intention of introducing, a tax regime specifically 
addressing  the  challenges  of  taxing  digital  economy  companies,  be  it  in  the  form  of  an 
indirect or direct tax. Therefore, to an extent, tax obstacles have been and are being created by 
the existing and forthcoming legislation of these Member States. As explained in Table 6 of 
Section  9.1,  these  national  experiences  vary  significantly,  and  it  is  unlikely  that,  without  a 
certain degree of coordination, the different Member States concerned will follow a common 
model.  Uncoordinated  national  actions  could  aggravate  the  current  situation,  further 
contributing to distortions in the single market and the risk of double taxation. Consequently, 
a common approach at EU-level in the area of taxation of digitalised companies is essential in 
order to avoid distortions that hamper the proper functioning of the single market. 

1.5  Subsidiarity: Added value of EU action 

EU action would be more efficient and would minimise compliance costs. The fact that an 
EU solution rather than different national policies is put forward would entail a reduction in 
the  compliance  burden  for  businesses  subject  to  the  new  rules.  Instead  of  fragmenting  the 
market  and  adding  cross-border  tax  obstacles  to  today's  tax  systems  through  unilateral 
measures, a coordinated EU action would ensure that the issue is addressed without hurting 
the single market and its competitiveness. Moreover, an EU answer to the challenges posed 
by  the  digital  economy  to  the  corporate  tax  framework  would  be  coherent  with  the  efforts 
already made to subject taxpayers to a single set of rules across the EU. Uncoordinated action 
targeting  the  digital  sector  would  undermine  the  existing  work  at  EU  level  on  the  wider 
corporate taxation rules.  

Another advantage of EU action is that it would help steer discussions at international 
level  on  the  taxation  of  the  digital  economy  in  a  more  effective  way  than  action  at 
Member  States  level.  EU  action  cannot  be  isolated  from  the  evolution  of  the  international 
corporate  tax  framework.  In  this  regard,  it  is  important  to  ensure  the  consistency  and 

21 

 
 
coherence of the tax rules put forward at EU level with the measures discussed and adopted 
by the OECD. However,  as  it has  so far proved difficult to  agree  on the solutions  at global 
level,  the  Commission  believes  that  it  is  time  to  promote  an  ambitious  EU  agenda  on  the 
matter  and  a  common  EU  approach  to  support  global  progress  towards  taxing  the  digital 
economy effectively and in a way that ensures fairness and supports growth. 

4. OBJECTIVES: WHAT IS TO BE ACHIEVED? 

Figure  (2)  below  presents  the  general  and  specific  objectives  of  the  initiative.  The  present 
initiative would result in two proposals: one focusing on an interim solution and another one 
focusing  on  a  comprehensive  long-term  solution,  The  general  objectives  of  the  two  sets  of 
proposals  are  the  same,  while  the  specific  and  operational  objectives  are  different.  The 
operational objectives will be described with the preferred option. 

Figure (2): Objective tree 

General 

Specific 

Operational 

Interim 
solution 

Comprehensive 
solution 

(see Section 
10) 

A comprehensive 
and modern 
framework for 
taxation of the 
digital economy 

Target untaxed 
digital business 
models through a 
solution that is 
easy to 
implement, 
improves the 
level-playing field 
and fair taxation. 

Integrity and proper 
functioning of the 
single market 

Sustainability of public 
finances of MS and the 
EU 

Ensuring fairness and a 
level playing field for all 
business 

Fight against aggresive 
tax planning 

1.6  General objectives 

For  both  the  interim  as  well  as  the  comprehensive  solution,  the  general  objectives  of  the 
initiative, are: 

  To protect the integrity of the single market and to ensure its proper functioning.  

22 

 
 
 
 
 
 
 
  To make sure that the public finances of Member States/ the EU are sustainable and 

that the national tax bases are not eroded in the future.  

  To ensure that social fairness is preserved and that there is a level playing field for all 
business  operating  in  the  EU.  The  proposals  aim  at  a  more  efficient  taxation 
framework that properly captures value creation. 

  To fight against  aggressive tax planning  and to  close  the gaps that currently exist  in 

the international rules.       

1.7  Specific objectives 

4.2.1  Comprehensive solution 

The specific objective of the comprehensive solution is to come forward with a modern 
corporate  tax  framework  which  allows  for  the  fair  and  efficient  taxation  of  the  digital 
economy. Such a framework would be adapted to the economy of the 21st century. It would 
modify  the  current  rules  which  were  mostly  designed  for  a  time  when  companies  were  not 
digitalised  and  more  physically  grounded  on  the  territory  of  a  state.  As  indicated  in  the 
Communication  on  Digital  Taxation,  the  ideal  solution  to  taxation  of  the  digital  economy 
would be through a global approach. Therefore, our proposal should both reflect what seems 
desirable  internationally,  but  also  be  easy  to  align  to  any  possible  emerging  international 
solution,  i.e.  broad  and  flexible  in  its  approach,  while  still  providing  Member  States  with  a 
solid base to effectively tax digital activity. 

4.2.2 

Interim solution 

The  specific  objective  of  the  interim  solution  is  to  put  forward  measures  that  would 
target certain digital activities as a proxy for the comprehensive solution.  This measure 
should be easier to implement and should level the playing field in the interim period until the 
comprehensive solution is implemented.  

5. WHAT ARE THE AVAILABLE COMPREHENSIVE POLICY OPTIONS? 

1.8  What is the baseline against which options are assessed? 

It  is  expected  that  the  development  of  the  digital  economy  will  follow  a  strong  growth 
pattern  over  the  next  decade.  The  digital  transformation  brings  significant  benefits  to 
society. It enables higher productivity across the economy, which leads to lower prices, higher 
real  incomes  and  to  higher  standards  of  living.  It  also  facilitates  the  emergence  of  new  and 
better products and services with fewer resources, reduces physically demanding efforts and, 
for example, exposure to dangerous activities in the workplace. Much of this is yet to come 
with the completion of the digital single market. The strategy launched in 2015 is defined as a 
space  in  which  the  free  movement  of  goods,  persons,  services  and  capital  is  ensured  and 
where  individuals  and businesses can seamlessly access and exercise online activities  under 
conditions  of  fair  competition,  and  a  high  level  of  consumer  and  personal  data  protection, 

23 

 
   
 
 
irrespective of their nationality or place of residence. Judging from the exponential trend that 
market  value  and  revenues  of  the  digital  economy  have  followed  over  the  past  years, 
significant growth in the years to come seems a reasonable assumption. As a consequence, the 
importance of the digital  economy versus the traditional economy will continue to increase. 
Traditional  companies  will  become  more  and  more  digital,  replacing  traditional  business 
models,  but  also  creating  completely  new  business  opportunities.  This  assumption  is  in  line 
with most projections of how the digital economy will develop in the future.28 

The  dynamic  baseline  scenario  takes  into  account  relevant  initiatives  at  various  levels 
(EU, OECD and Member States) and assesses whether  they address the tax challenges 
posed  by  the  digital  economy.  Two  aspects  are  important  in  this  assessment.  First,  do  the 
initiatives effectively address structural shortcomings of the current international tax system? 
Second,  do  they  reduce  specific  tax  avoidance  opportunities  that  businesses  of  the  digital 
economy can apply more easily than other companies. 

EU level 

In the baseline scenario, we expect that all current relevant Commission initiatives will 
be adopted and implemented as planned.  

  The  implementation  of  the  Common  (Consolidated)  Corporate  Tax  Base  (CCCTB), 
adopted by the Commission in October 2016, is envisaged in two steps. In a first step, 
Member  States  would  adopt  common  tax  base rules  by  2019.  In  a  second  step,  they 
would move to consolidation and apportionment of the tax base through a formula by 
2021.   

  The  Anti-Tax  Avoidance  Directive  that  was  adopted  in  July  2016  and  will  be 

implemented in most parts as of January 2019. 

 

In  December  2017,  the  EU  finance  ministers  adopted  a  package29  on  VAT  in  e-
commerce, moving towards the definitive regime.  

The CCCTB in its current scope and form would not offer a structural solution to some 
of the important challenges in taxing businesses of the digital economy. The CCCTB has 
a limited scope and companies not subject to mandatory application would remain subject to 
the  standard  profit  allocation  rules.  However,  even  for  companies  applying  the  CCCTB, 
problems remain. Despite the fact that the profit allocation rules in the CCCTB partly allocate 
the tax base on the basis of sales by destination, when it comes to defining taxable presence 
through  a  permanent  establishment,  the  CCCTB  rules  are  not  different  from  those  applying 
internationally  (which  only  reflect  the  needs  of  the  traditional  economy  and  are  primarily 
based on a physical presence). For illustration, a company that is not incorporated in the EU 

28 Projections for these developments can be found inter alia in the Statista Digital Market Outlook, UNCTAD 
(2017a, 2017b) and OECD Digital Economy Outlook (2017). 
29 One proposal of a directive and two of regulations 

24 

 
                                                 
and  does  not  have  an  affiliate  or  a  permanent  establishment  in  an  EU  country,  will  not  be 
subject  to  tax  under  the  CCCTB  rules,  even  if  it  carries  out  significant  economic  (digital) 
activity in the EU. Similarly, if it has sales in all Member States but has a physical presence in 
only  a  few  Member  States,  the  consolidated  profit  will  be  allocated  via  a  formula  only 
between  those  Member  States  where  it  has  a  physical  presence,  at  the  exclusion  of  other 
Member  States,  even  though  the  company  carries  out  digital  activities  in  their  jurisdictions 
(see box in Annex 6).  

A second issue not solved by the CCCTB concerns cases where sales by destination do 
not capture well the economic activity of the company (and neither do tangible assets or 
employment).  This  concerns  above  all  business  models  such  as  advertising  models  that 
operate  through  indirect  revenue  generation.  They  offer  their  services  to  users  for  free  and 
make  their  revenues  by  selling  (targeted)  advertising  space  displayed  to  users.  An  example 
could be a company group that operates, say, a social network site and makes revenues from 
advertising. It has subsidiaries (i.e., it is tax resident) in all Member States, but they operate 
with  few  tangible  assets  and  employees.  Further,  all  its  advertising  revenues  stem  from 
companies resident in A or in third countries. The company has a dense user network in all 
Member States and uses the user data that it collects to target and display advertisements in all 
Member States  from which its users access its website. The formulary  apportionment  under 
the  CCCTB,  by  considering  only  assets,  labour  and  sales  by  destination,  would  allocate 
(almost) the entire tax base of the company group to Member State A. 

Regarding, tax avoidance opportunities, the CCCTB does help closing important profit 
shifting  possibilities,  but  it  does  not  address  the  artificial  avoidance  of  permanent 
establishments. This is because, as explained above, the CCCTB as proposed in 2016 follows 
the definition of permanent establishment currently applied internationally.  

The  legally-binding  anti-avoidance  rules  that  have  been  agreed  at  EU  level  are  not 
expected  to  deal  comprehensively  with  the  specific  challenges  of  the  digital  economy. 
Most  notably,  the  new  Controlled-Foreign  Company  rules  in  the  Anti-Tax  Avoidance 
Directive only address situations where the ultimate parent company is a taxpayer in the EU. 
The Commission issued a Recommendation in 2016 on Tax Treaty issues,30 which encourages 
Member  States  to  implement  the  new  provisions  on  permanent  establishments,  as  agreed  in 
the  BEPS  Action  7  (see  discussion  below).  It  includes  ensuring  that  the  permanent 
establishment  status  cannot  be  circumvented  through  'commissionaire  arrangements'  or 
similar  structures,  and  that  core  activities  do  not  benefit  from  the  exception  for 
preparatory/auxiliary  activities.  However 
this  Recommendation  does  not  address 
comprehensively  the  avoidance  of  permanent  establishments  by  the  digital  economy. 
Moreover  a  Recommendation  is  not  a  legally  binding  act  and  Member  States  are  free  to 
decide whether or not to implement it.31  

30 Commission Recommendation (EU) 2016/136 of 28 January 2016 on the implementation of measures against 
tax treaty abuse (OJ L 25, 2.2.2016) 
31 Statistics on the implementation of the recommendation are not yet available. 

25 

 
                                                 
OECD level 

The  final  Action  1  report  (OECD,  2015a)  discusses  the  broader  direct  tax  challenges 
raised by the digital economy. It examines three reform options: extending the definition of 
permanent  establishment  to  cover  also  significant  economic  presence,  a  withholding  tax  on 
digital  transactions  and  a  so-called  equalisation  levy.  The  report  does  not  issue  any 
recommendation. In March 2017, the G20 Finance Ministers requested that the OECD's Task 
Force on the Taxation of the Digital Economy deliver an interim report on the implications of 
digitalisation for taxation by April 2018. The OECD has recently published this interim report 
on the taxation of the digital economy and presented it to the G20 Finance Ministers at their 
meeting in March 2018 (OECD, 2018).  A final report is due in 2020, with a progress update 
in 2019. 

Although  reaching  a  consensus  on  such  a  complex  topic  is  difficult,  the  OECD  has 
intensified  its  work  to  tackle  the  tax  challenges  arising  in  the  digital  economy. 
Discussions  at  OECD  level  are  essential  in  order  to  address  at  a  global  level  a  challenge 
which  is  fundamentally  a  global  one.  The  main  elements  of  the  on-going  OECD  work  on 
digital  taxation  seem  largely  consistent  with  those  of  the  Commission.  While  the  final 
outcome of the OECD discussions is uncertain, the recently published interim report (OECD, 
2018)  suggests  that  the  focus  could  be  on  the  comprehensive  solution.  As  explained  in  the 
final Action 1 report (OECD, 2015a), the broader tax challenges for policy makers relate in 
particular to nexus, data, and characterisation for direct tax purposes. At this stage, the OECD 
work on a comprehensive solution remains quite open, but clearly includes work on revised 
permanent  establishment  and  profit  allocation  rules.  At  the  same  time  there  appears  little 
appetite for taking any interim measures to bridge the time until comprehensive solutions are 
agreed and implemented.  

Relevant  work  on  anti-abuse  rules  initiated  by  the  OECD  has  started  to  bear  some 
fruits,  but  there  remain  important  gaps.  The  potentially  most  relevant  areas  are  in  the 
proposed  amendments  to  the  definition  of  permanent  establishment  (BEPS  action  7)  and  to 
transfer pricing rules (BEPS actions 8-10). Article 5 of the OECD Model Tax Convention has 
been  amended  to  ensure  that,  where  the  activities  of  an  intermediary  result  in  the  regular 
conclusion  of  contracts  to  be  performed  by  a  foreign  enterprise,  that  enterprise  should  be 
considered to have a sufficient taxable nexus in that country.32 The changes proposed under 
Action 7 limit the exemptions to activities that are of a preparatory or auxiliary character i.e. 
businesses can only qualify for these exemptions if the activity in question is not a core part of 
their  business  model.  So  a  large  warehouse  maintained  by  online  sales  business  for  the 
purpose  of  storing  and  delivering  goods  sold  by  that  business  would  constitute  an  essential 

32 "For example, where the sales force of a local subsidiary of an online seller of tangible products or an online 
provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective 
large  clients  for  those  products  or  services,  and  these  contracts  are  routinely  concluded  without  material 
modification  by  the  parent  company,  this  activity  would  result  in  a  permanent  establishment  for  the  parent 
company." (OECD, 2015b). 

26 

 
                                                 
part  of  the  sales  and  distribution  function  of  that  business.  As  a  result  the  warehousing 
function would no longer qualify for the preparatory and auxiliary activity exemption.  

The revised permanent establishment rules remain grounded in the concept of physical 
presence and target above all abuse structures used by online retailers of physical goods. 
They do not offer comprehensive solutions to the avoidance of permanent establishments by 
the  digital  economy.  Indeed,  the  amendments  to  the  permanent  establishment  rules  target 
primarily artificial avoidance arrangements that have been used by online retailers of physical 
goods that still require some local physical presence, for example for storage and transport of 
physical goods (Avi-Yonah and Xu, 2017, BEPS Monitoring Group, 201533).  

In  addition,  there  also  remain  implementation  gaps.  The  amendments  are  implemented 
either in the course of bilateral tax treaty negotiations or through the Multilateral Convention 
to  Implement  Tax  Treaty  Related  Measures  to  Prevent  Base  Erosion  and  Profit  Shifting 
(known  as  the  ‘Multilateral  Instrument’),  but  some  countries  have  reserved  against  these. 
However,  the  amendments  are  not  binding  and  their  effective  implementation  will  largely 
depend on national legislation and revisions to bilateral treaties. An uncoordinated approach is 
unlikely to lead to a break-through. Many countries will not have the incentive to agree on a 
revision of rules if they cannot be assured that other countries will implement similar reforms. 
Moreover,  some  consider  that  the  lack  of  properly  defined  mechanisms  in  the  new  transfer 
pricing  guidance  may  increase  legal  uncertainty  regarding  the  taxation  of  international 
business models (Olbert and Spengel, 2017).  

In the context of the anti-Base Erosion and Profit Shifting Project, harmful tax practices 
have  been  addressed  inter  alia  through  action  5  and  this  is  expected  to  reduce  tax 
planning  opportunities,  notably  those  involving  intellectual  property  boxes.  The 
overwhelming  majority  of  existing  beneficial  tax  regimes  for  intellectual  property  were 
abolished  or  amended  in  line  with  the  'nexus  approach',  both  at  EU  and  at  global  level 
(through the Inclusive Framework).34 This is expected to reduce tax planning opportunities by 
transferring intellectual property to low tax jurisdictions. 

Measures to prevent tax treaty abuse have started to be widely implemented. More than 
70  jurisdictions  signed  the  Multilateral  Convention  to  Implement  Tax  Treaty  Related 
Measures  to  Prevent  Base  Erosion  and  Profit  Shifting  (known  as  the  'Multilateral 
Instrument'),35 whereby about a third of existing tax treaties will be aligned with the minimum 
standard  on  action  6.  Treaty  abuse  is  relevant  given  the  increased  ability  to  choose  the 
location of resources (e.g. intellectual property) that are key to digital activities.  

Unilateral actions by Member States 

33 See comments published by the BEPS Monitoring Group on Action 7 published at 
https://bepsmonitoringgroup.wordpress.com/category/action-7/  
34 All EU Member States except for Cyprus are members of the Inclusive Framework. 
 In the EU, the amendment to the Directive on the automatic exchange of information has made the exchange of 
rulings legally binding. 
35 All EU Member States have already signed except for Estonia, which has expressed its intention to sign the 
Multilateral Convention.  

27 

 
                                                 
In the absence of effective responses to the tax challenges posed by the digitalisation of 
the  economy,  it  is  likely  that  more  and  more  Member  States,  but  also  third  countries, 
will take unilateral action . In its conclusions of 5 December, the Council observes that "the 
speed at which the economy is digitalising and the absence of international consensus on the 
modernisation  of  the  rules  of  distribution  of  taxing  rights  gives  rise  to  unilateral  actions, 
leading  to  an  increase  of  double  taxation  disputes  between  Member  States  and  thereby 
undermining  the  Internal  Market".36  Going  forward  and  taking  into  account  its  dynamic 
growth, the digital economy will not contribute proportionally to the tax revenues of Member 
States  when  compared  to  the  traditional  economy.  If  the  current  trend  continues,  public 
budgets will likely suffer to an extent that will put increasing pressure on policy makers to act. 
The unfairness of the situation would lead to increased pressure from citizens and traditional 
businesses. In addition, to ensure compliance with EU fiscal rules, governments will need to 
search  for  compensatory  measures.  Therefore,  it  is  also  assumed  that  the  trend  towards 
unilateral solutions will continue in the absence of solutions coordinated at international level. 
An overview of unilateral measures implemented or planned in EU Member States and third 
countries can be found in section 9.1 and Annex 6. 

In  the  absence  of  action,  the  digital  single  market  will  not  be  able  to  deliver  on  its 
potential.  A  digital  single  market  can  only  deliver  on  its  potential  if  fair  competition  is 
guaranteed,  including  equitable  tax  treatment  for  all  companies.  As  larger  parts  of  the 
economy  become  digital,  they  will  have  to  shoulder  a  corresponding  part  of  the  tax  burden 
needed to finance the public services on which they rely, such as educational or the judicial 
system.  Yet  this  is  not  the  case  at  this  moment  and  is  likely  to  aggravate  if  the  situation 
remains unchanged.  

To sum up, no significant progress has been made, or is expected within the next couple 
of years, in finding structural and comprehensive solutions to addressing the challenges 
of  taxation brought about by  the  digitalisation of  the  economy. Some progress has  been 
made in addressing specific abuse channels, notably in relation to beneficial regimes targeting 
intellectual  property.  Proposed  revisions  to  permanent  establishment  rules  target  primarily 
avoidance  structures  employed  by  online  retailers  of  physical  goods  and  fail  to  establish  a 
nexus based on digital presence instead of physical presence (Olbert and Spengel, 2015, and 
Blum, 2015).  

1.9  What are the available comprehensive policy options? 

Table (3): Summary of retained and discarded comprehensive policy options 

36 ECOFIN Council conclusion, 'A' Item note 15175/17 

28 

 
 
                                                 
5.2.1 

Options for fundamental reform  

1.9.1.1  Destination-based tax 

The destination-based cash-flow tax was identified in the report of the Expert Group on 
Digital Economy (2014) as a possible holistic option to address the challenges of taxing 
the digital economy. This tax has two distinct features. First, the cash-flow element provides 
that all revenues and expenditures are accounted for at the time as the related payments are 
executed.  This  includes  expenditures  for  capital  investments  which  hence  would  become 
immediately  expensed,  instead  of  being  deductible  over  time  through  depreciation 
allowances.  Computing  the  tax  base  on  a  cash-flow  basis  is  not  essential  to  address  the 
challenges  of  taxing  profits  from  digital  business  models.  Second,  the  destination  principle 
implies that the jurisdiction with the right to tax is the one of the location of the consumer of 
the goods or services sold. This second feature implies a right to tax in jurisdictions where the 
customers  of  companies  are  located,  irrespective  of  whether  the  company  has  any  taxable 
presence in that jurisdiction (a subsidiary or a permanent establishment). It would thus be a 
far-reaching change to the (international) corporate tax system.  

29 

Comprehensive policy optionsShort descriptionFurther assessmentDestination-based taxAllocates the right to tax exclusively to the jurisdiction where the good or service is consumed.DiscardedUnitary taxWorldwide consolidated profits are apportioned according to turnover generated in each jurisdiction.DiscardedResidence tax base with destination tax rateTaxing right and profit allocation rules remain as they are today, but the tax rate applied to the tax base in a jurisdiction is a weighted average of the tax rates of the countries where the turnover was generated. DiscardedIntra-EU - narrow scope: Adjustments to the CCCTB rulesRevision of permanenet establishment rules and the apportionment formula in the CCCTB.Option 1Intra-EU - wide scope: Directive on new permanent establishment and profit allocation principles + adjustments to the CCCTB rulesThe Directive would establish new and common permanent establishment rules wihtin the EU, applicable to all businesses. The new rules would also be incorporated in the CCCTB. Option 2Intra-EU - wide scope + mandatory application vis-à-vis third countriesIn addition to the previous option (Intra-EU - wide scope), the Directive would mandate EU Member States to apply the new rules vis-à-vis third countries.DiscardedIntra-EU - wide scope + recommend application vis-à-vis third countriesIn addition to the option (Intra-EU - wide scope), a separate Recommendation would be made to EU Member States to revise their double tax treates with third countries to reflect the new rules. The Commission would seek a mandate to negotiate the revisions vis-a-vis third countries, where this is of particular interest.Option 3Include the online sale of goodsOption a1Exlcude the online sale of goodsOption a2Alternative application of digital activity thresholdsAs soon as one of the thresholds is exceeded, the permanent establishment is triggered. This would allow capturing the widest range of business models.Option b1Cumulative application of digital activity thresholdsThis would result in a fairly narrow scope as the test would fail as soon as one criterion is not satisfied.Option b2Revenue thresholds plus alternative application of other thresholdsThis would ensure that the revenue threshold is always applied, but otherwise allow for wide scope. Option b3Fundamental reformsRealignment within current international tax framework (new permanenent establishment and profit allocation rules)Design options for a digital permanenet establishment 
 
 
There are various ways to implement the destination principle and one possibility would 
be to adjust rules within the CCCTB. One possibility is to implement a destination-based 
tax more narrowly within the remits of the CCCTB. It would involve adapting the permanent 
establishment rules in the CCCTB to the digital economy. In addition, the formula would be 
adjusted to be exclusively based on sales by destination.     

1.9.1.2  Unitary tax 

The tax would apply on worldwide profits, allocated on the basis of where the turnover 
is  generated.  Each  EU  Member  State  would  get  a  share  of  the  world  profit  of  the  digital 
companies that corresponds to the share of turnover generated in its country. To be effective 
the tax would also require the introduction of a new digital tax nexus to levy and collect the 
tax  in  cases  where  a  company  carries  out  significant  digital  activities  in  a  country.  The 
determination  of  what  constitutes  such  presence  would  need  to  consider  also  the  amount  of 
turnover generated in the country.  

The unitary tax would apply in replacement of the corporate income tax for companies 
that  undertake  mainly  digital  activities.  This would  require  defining  the  conditions  under 
which a company would be considered to carry out mainly digital activities. As such it would 
require  a  careful  assessment  of  firms'  operations  to  determine  under  which  framework  they 
fall.    The  rate  would  be  national  corporate  income  tax  rates,  but  could  be  set  at  levels  that 
differ from  the currently applicable rate, at the discretion of Member States. For  companies 
not established in the Member State that would have some taxing right under the unitary tax 
system, the system would most likely require the use of a one-stop shop in order to enforce 
the tax.  

1.9.1.3  Residence tax base with destination tax rate 

The  taxing  right  would  remain  with  Member  States  where  companies  have  their  tax 
residence,  according  to  current  rules.  Also,  the  rules  for  computing  the  tax  base  in  the 
Member State of tax residence would continue to apply. Subsequently the tax base would be 
apportioned on the basis of where the turnover is generated; and for each of such portions the 
rate  of  the  country  where  the  turnover  is  generated  would  apply.  Profits  would  still  be 
declared and taxed (albeit at a weighted average of the rates where the company generates its 
turnover) in the Member State of tax residence. 

The  system  would  apply  in  replacement  of  the  corporate  income  tax  system  for 
companies  that  undertake  mainly  digital  activities.    As  such  it  would  require  a  careful 
assessment of firms' operations to determine under which framework they fall. Different from 
the  other  comprehensive  options,  a  new  nexus  definition  would  not  be  necessary.  The  rate 
would  vary  depending  of  the  origin  of  the  turnover.  It  would  require  the  use  of  a  one-stop 
shop and the creation of a monitoring authority at the EU level.   

1.9.2  Options for realigning the rules within the current international tax framework 

These  options  revolve  around  amending  the  permanent  establishment  and  profit 
allocation rules. They differ  mainly with  respect to  their scope, and in  two ways.  The first 

30 

 
distinction is with regard to company size, i.e. whether the option applies only to the largest 
companies  or  has  a  broader  scope.  The  second  distinction  is  with  regard  to  the  territorial 
application,  i.e.  whether  the  option  applies  only  intra-EU  or  also  vis-à-vis  third  countries. 
Section 5.2.2.4 discusses a number of design options that apply to these options. 

1.9.2.1  Realigning profit allocation rules with value creation intra-EU 

These options would override the double tax treaties between Member States but would have 
no  effect  in  relation  to  third  countries,  except  possibly  those  not  having  a  double  tax 
convention with a given Member State.  

(a)  Narrow  scope:  Amend  the  rules  for  the  Common  Consolidated  Corporate  Tax  Base 
(Option 1) 

Rules  that  trigger  a  digital  permanent  establishment  would  be  added  to  the  CCCTB 
Directive. Once agreed, the CCCTB would provide a competitive, fair and robust framework 
for taxing companies in the single market. A comprehensive option would then be to amend 
the  current  proposal  to  better  capture  features  of  the  digital  economy.  A  digital  permanent 
establishment  of  an  EU  company  would  be  triggered  in  a  Member  State  and  be  subject  to 
corporate income tax on its digital activities once a set of conditions is met. This option would 
, in principle, be broadly in line with the draft European Parliament amendment on the CCTB 
and the CCCTB proposals adopted by the Committee on Economic and Monetary Affairs that 
propose  to  introduce  a  digital  presence  concept  in  the  CCTB.  As  the  CCCTB  applies 
mandatorily to groups of companies with more than EUR 750 million in global turnover, the 
new  rules  would  also  mainly  apply  to  these  companies.  Since  the  CCCTB  cannot  override 
double  tax  treaties  between  Member  States  and  third  countries,  it  would  not  impact  the 
taxation of companies unless they are already tax resident in at least one Member State.   

Companies that exceed certain digital activity thresholds in a given Member State would 
trigger  a  digital  permanent  establishment  in  that  Member  State.  The  digital  activity 
thresholds could be based on revenues from relevant digital services, number of users and/or 
online  contracts  concluded.  Any  EU  company  (or  third  country  company  where  there  is  no 
applicable double tax treaty37) would trigger a digital permanent establishment in a Member 
State, and therefore be subject to taxation on its digital activities, if it exceeds certain activity 
thresholds in a tax year, such as: 

revenues from digital services in a Member State exceeds EUR [x];  

 
  number of active users of the digital service in a Member State exceeds [x]; 
  number of online contracts concluded exceeds [x].  

The  proxies  identified,  such  as  number  of  active  or  registered  users, number  of  of  clicks  or 
contracts, can be identified and linked to a Member State using, for example, the prevailing IP 
address of the user, local domain names, language or local platform criteria. 

37 See explanation in relation to third countries in the next subsection. 

31 

 
 
                                                 
In a second step under this option, and for application at the consolidation level, the use 
of  the  formula  currently  proposed  to  attribute  profits  could  be  revisited.  Options  for 
adapting the apportionment formula range from making the formula entirely based on sales by 
destination to adding a fourth factor to the existing CCCTB formula that would capture digital 
activities. This factor could be measured by data such as the number of users or the number of 
page visits.  

(b) Wide scope: Directive on digital permanent establishment (plus adapted CCCTB)(Option 
2) 

This option revolves around a proposal for a standalone directive establishing common 
EU rules for a digital permanent establishment and its profit attribution. The standalone 
EU  Directive  would  establish  a  common  system  for  a  digital  permanent  establishment  and 
principles  for  allocating  profits  to  digital  activities  of  such  permanent  establishments.  New 
rules on a digital permanent establishment would take the same form as outlined above for the 
CCCTB. It would override double tax conventions between EU Member States and also apply 
in  cross-border  situations  vis-à-vis  third  countries  that  do  not  have  a  double  tax  convention 
with a particular Member State. Double tax conventions with third countries would continue 
to apply. 

A Member State’s tax authorities also need to be able to attribute profits to permanent 
establishments  in  that  state  to  reflect  the  digital  activities  therein.  This  step  follows  the 
establishment  of  a  taxing  right  in  a  Member  State  through  changes  to  the  definition  of  the 
permanent establishment. Therefore, the Directive would also set out the principles for how 
profit would be attributed to the digital permanent establishment. 

The fundamental principle for profit allocation should remain that taxation takes place 
in  the  jurisdiction  where  value  is  created.  Considering  that  in  the  digital  economy,  a 
significant  part  of  the  value  of  a  business  is  created  where  the  users  are  based  and  data  is 
collected and processed, the directive would set out criteria specifically targeted at attributing 
profit  to  a  digital  permanent  establishment.  For  example,  these  criteria  could  be  based  on 
criteria such as: 

the users' engagements and contributions to the development of a platform;  
the data collected from users in a Member State through a digital platform; 

 
 
  number of users; and/or 
  user-generated content. 

The standalone directive rules would then be included in the CCTB and the CCCTB (as 
it was done with the  provisions  of the  Anti-Tax Avoidance  Directive). In contrast  to the 
narrow CCCTB option, the scope of this directive would be wider, applying generally and not 
only to groups of companies above the EUR 750 million turnover threshold. 

32 

 
 
 
 
1.9.2.2  Realigning  profit  allocation  rules  with  value  creation  intra-EU  and  vis-à-vis  third 

countries 

This option expands the territorial scope of the standalone Directive to apply not only in 
intra-EU  situations  but  also  between  Member  States  and  third  countries.  This  would 
oblige Member States to renegotiate their existing double tax conventions with third countries 
in accordance with the rules of the Directive. As with the intra-EU solution, it would also lead 
to an adaptation of the CCCTB rules to be consistent with the new rules.  

1.9.2.3  Realigning profit allocation rules with value creation intra-EU and recommendation 

to change rules vis-à-vis third countries (Option 3) 

This option would supplement the standalone directive that applies in intra-EU situations (as 
set out in section 5.2.2.1) between Member States with a recommendation to Member States 
to amend their double tax treaties with third countries setting out the proposed changes to the 
double  taxation  treaties  in  relation  to  Article  5  (Permanent  Establishment)  and  Article  7 
(Business  Profits)  of  the  OECD  Model  Tax  Convention.  This  recommendation  would  be 
addressed  to  Member  States,  but  it  could  also  influence  the  debate  at  international  level  on 
addressing the challenges of taxing the digital economy. To complement the recommendation, 
the Commission could, without prejudice to the EU and Member States' competences, assist 
Member  States  in  the  negotiation  of  these  provisions  with  selected  third  countries  in  a 
coordinated manner at the Union level, if authorised to do so by the Council. 

1.9.2.4  Design options: Type and level of digital activities  

For  all  options  in  this  category,  there  are  some  important  design  choices  to  be  made 
concerning  the  type  and  level  of  digital  activities  reflected  in  the  new  permanent 
establishment  rules.  For  the  type  of  activities,  the  two  key  alternatives  considered  are  to 
include all types of digital activities, irrespective of whether the activity consists in the supply 
of a physical good ordered online, or to focus on digital activities that are services.  

Option a1: Including the online sale of goods.  

Option a2: Excluding the online sale of goods. 

For the digital activity thresholds, two different types of metrics have been discussed: a 
threshold on revenue earned from digital activities in the jurisdiction or a threshold on 
the activity by users in the jurisdiction (for example, measured by the number of users or 
number of online contracts).  A key question is whether to require that these thresholds apply 
cumulatively,  so  that  a  permanent  establishment  is  triggered  only  if  all  thresholds  are 
surpassed, or alternatively, so that it suffices to surpass one or a subset of thresholds. 

Option b1: Operating the different thresholds alternatively (i.e. as soon as one of the 
thresholds  is  exceeded,  the  permanent  establishment  is  triggered).  This  would  allow 
capturing the widest range of business models. 

Option  b2:  Operating  the  different  thresholds  cumulatively.  This  would  result  in  a 
fairly narrow scope as the test would fail as soon as one criterion is not satisfied. 

33 

 
Option  b3:  Operating  the  revenue  threshold  in  combination  with  other  thresholds, 
which can apply alternatively.  

Further, the level of each digital activity threshold needs to be determined.  

1.10 Policy options discarded at an early stage 

Fundamental  reforms,  such  as  destination-based  cash  flow  tax,  unitary  taxation  and 
residence  tax  base  with  destination  tax  rates,  would  not  only  fundamentally  challenge 
the international tax system, but they also have the potential to address the problems at 
their  roots.  They  however  do  not  yet  seem  to  be  a  priority  of  Member  States  at this  stage, 
who prefer to adapt the current system. In its conclusions of 5 December 2017, the Council 
underlines  instead  that  'a  globally  accepted  definition  of  permanent  establishment  and  the 
related  transfer  pricing  and  profit  attribution  rules  should  also  remain  pivotal  when 
addressing the challenges of taxation of profits of the digital economy'.38   

As such, it shall be noted that fundamental reforms would not square with the CCCTB 
proposal. They imply the need to implement a separate tax system for the digital economy (or 
to  depart  from  the  CCCTB  provisions  if  the  fundamental  reform  were  to  be  applied  to  the 
entire economy).  

Even though both unitary tax  and residence-tax base with destination tax  rate have in 
principle  good  economic  properties,  they  are  discarded  at  this  stage.  The  unitary  tax 
raises considerable implementation issues, as it challenges today's international corporate tax 
system  in  a  fundamental  way.  Making  tax  revenue  collected  in  one  Member  State  directly 
dependent  on  tax  rates  set  by  other  countries  –  the  option  of  a  residence  tax  base  with  a 
destination tax rate - would pose important legal challenges, notably issues of equal treatment 
within Member States. It could also increase tax competition on the definition of the taxable 
base  so  as  to  attract  more  companies.  Furthermore,  neither  option  is  coherent  with  the 
CCCTB  and  would,  if  applied  only  to  companies  in  the  digital  economy,  require  Member 
States to operate an additional corporate tax system, next to the CCCTB and their national tax 
systems.  

Despite some strong features of the destination-based (cash-flow) tax, only the option of 
implementing  the  destination-principle  within  the  CCCTB  is  retained.  Numerous 
contributions  in  the  literature  have  shown  that  the  destination-based  (cash  flow)  tax  can  be 
both  an  efficient  tax  and  effective  in  addressing  tax  planning  issues  (see  Annex  9  for  a 
summary).39  However,  as  with  the  other  discarded  options,  implementing  the  destination-
based  tax  in  full,  would  not  be  coherent  with  the  CCCTB  and  require  Member  States  to 
operate an additional corporate tax system, next to the CCCTB and their national tax systems. 
For  this  reason,  implementing  a  separate  destination-based  tax  for  digital  companies  is  not 

38 ECOFIN Council conclusion, 'A' Item note 15175/17 
39 See for example Devereux and de la Feria (2014),  

34 

 
 
                                                 
retained. Only the option of implementing the destination principle within the CCCTB will be 
examined.   

Obliging Member States to apply the new permanent establishment and profit allocation 
rules of the standalone Directive also vis-à-vis third countries, thereby requiring them to 
break their contracts with third countries, is not a viable option. This option would also 
cover digital activity in the EU of companies that are currently not tax residents anywhere in 
the  EU.  Once  fully  implemented,  it  would  therefore  provide  for  a  more  level  playing  field 
between EU companies and companies of third countries. As such, it would also provide for a 
stronger,  more  positive  impact  on  public  finances  and  be  overall  fairer.  However,  it  would 
likely  contribute  to  a  prolonged  period  of  uncertainty  for  companies.  As  long  as  double  tax 
conventions  are  not  re-negotiated,  companies  would  face  the  uncertainty  of  which  rules  a 
Member  State  would  follow:  the  rules  in  the  Directive  or  those  in  the  relevant  double  tax 
convention. Above all, introducing an obligation on Member States that affects their contracts 
with third countries is not a realistic option. Therefore this approach is rejected.  

6. WHAT ARE THE IMPACTS OF THE COMPREHENSIVE POLICY 

OPTIONS? 

1.11 Realigning  profit  allocation  rules  with  value  creation  intra-EU    -

Options 1 and 2 

1.11.1  Option 1 - Narrow scope: Common Consolidated Corporate Tax Base adapted to the 

digital economy 

This  option  implies  that  the  solution  would  affect  only  companies  that  apply  the 
CCCTB.  Specifically, only  companies  with  a global  consolidated  turnover  above  EUR  750 
million would be subject to the new rules whereas other companies would apply the new rules 
only  if  they  elect  to  do  so.  As  a  result,  the  new  rules  on  permanent  establishment  and 
allocation  of  profits,  would  not  apply  uniformly  to  all  businesses.  Moreover,  all  Member 
States would have to operate two very different sets of permanent establishment rules. 

Examples  

Company X, established in  Member State A and with a global consolidated turnover above 
EUR  750  million  and  thus  falling  under  the  mandatory  scope  of  the  CCCTB,  carries  out 
relevant digital activities in Member State B.  The new rules on a significant digital presence 
would trigger a  permanent establishment of company X in  Member State B. It is envisaged 
that under new profit allocation rules in the CCCTB part of the profits of company X would 
be allocated to Member State B.  

Company Y, established in a Member State and carrying out similar digital activities but with 
a  global  turnover  below  EUR  750  million  would  not  be  subject  to  the  new  rules.  It  would 
however have the possibility to apply the CCCTB on a voluntary basis.  

35 

 
 
  
The  new  rules  would  never  apply  to  a  company  Z  established  outside  the  European  Union 
even  if  performing  digital  activities  in  a  Member  State.  Moreover,  in  the  absence  of  an 
agreement  on  the  CCCTB,  the  new  rules  would  not  apply  to  any  company,  whether  it  falls 
under the mandatory scope or opts to apply the rules of the CCCTB.   

 (a) Integrity of the single market 

The implementation of the CCCTB adapted to the digital economy would limit the risk 
of  additional  distortions  from  unilateral  actions,  but  not  completely  eliminate  it.  The 
adapted CCCTB will offer a solution for the largest digitalised businesses and as such relieve 
some of the pressure for Member States to come up with national measures. However, as the 
scope of the CCCTB is relatively narrow - due to the high global turnover threshold for the 
mandatory scope – there remains a risk that unilateral measures are taken to complement the 
new rules under the CCCTB.  

Furthermore, introducing a solution that is contingent upon application of the CCCTB 
introduces new distortions in the single market. Companies that apply the CCCTB would 
be  subject  to  the  new  rules  for  a  digital  permanent  establishment,  whereas  companies  with 
digital  activities  and  not  subject  to  the  CCCTB  would  not  be  captured  by  the  new  digital 
permanent establishment rules. In  this  scenario, it could well be that a company outside the 
CCCTB  pays  taxes  in  only  one  EU  Member  State  whereas  the  same  company  would  pay 
taxes  in  all  EU  Member  States  if  it  applied  the  CCCTB.  Apart  from  introducing  new 
distortions between companies within and outside the CCCTB, this feature would also make 
the  decision  of  whether  to  opt  into  the  CCCTB  system  more  complicated  than  before.  This 
would possibly impede the attractiveness of the CCCTB. In the amendments made in the draft 
European Parliament reports adopted by the Committee for Economic and Monetary Affairs 
on  the    CCTB  and  CCCTB  proposals40,  the  introduction  of  new  nexus  rules  for  digital 
presence  is  combined  with  a  phase-out  of  the  mandatory  threshold,  which  would  mean  the 
new rules would apply generally and not only for a subset of companies.  

(b) Sustainability of public finances  

The  impact  on  public  finances  is  primarily  about  contributing  to  the  long-run 
sustainability of the corporate tax system. At first, the impact on public finances is likely to 
be small. This is simply due to the still relatively small contribution of the digital economy to 
the economy. UNCTAD (2017c) estimates it to be on average 4.3% of value added in the EU, 
but there is no consensus estimate (see footnote 42). In addition, average corporate income tax 
revenue is small compared to other taxes, amounting to only 2.5% of GDP in 2015 (European 
Commission,  2017a).  However,  due  to  the  continued  trend  towards  digitalisation  and  the 
expectation  that  the  traditional  economy  will  also  become  more  digitalised,  the  measure  is 
expected  to  contribute  to  the  sustainability  of  the  corporate  income  tax  system.  As  the 

40 DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION on the proposal for a Council 
directive on a Common Corporate Tax Base (COM(2016)0685 – C8-0472/2016 – 2016/0337(CNS)). 

36 

 
                                                 
corporate income tax also serves as a backstop to personal income tax, there is likely a wider 
impact on public finances.  

A significant increase in  tax base at EU level is not expected, but there will likely be a 
certain  amount  of  reallocation  of  tax  revenues  across  Member  States.  The  main  effect 
will be one of better-aligned locations of value creation and taxing rights. At least at first, a 
significant  increase  in  tax  base  at  EU  level,  compared  to  the  baseline  scenario,  is  not 
expected. As the adapted rules would address intra-EU situations, it does not directly tackle 
issues  where  a  disproportionate  amount  of  tax  base  is  attributed  to  third  countries.41 
Reallocation  of  tax  base  would  occur  in  situations  where  a  Member  State  is  a  significant 
marketplace for digital companies but none of the digital activities are booked for tax purpose 
there, because according to current rules they are centralised in one or a few other Member 
States.  Thus  the  Directive  would  address  situations  where  there  is  a  certain  level  of  digital 
activity, but a lack of physical presence prevents Member States from taxing it. It would also 
address situations where there is currently a permanent establishment in a Member State but 
that  permanent  establishment  is  not  taxed  on  the  profits  from  the  digital  activity  in  that 
Member State, because the activity does not involve, or only to a disproportionate extent, any 
of  the  three  factors,  i.e.  tangible  assets,  labour  and  sales  by  destination,  considered  in  the 
profit allocation formula of the CCCTB. 

Due to the new digital permanent establishments created, it is expected that companies 
would  find  it  more  difficult  to  do  tax  planning,  increasing  tax  revenue  overall.  As 
companies have less control over where their activities are taxed it would be more difficult to 
artificially  attribute  profits  (for  example  through  artificial  avoidance  of  permanent 
establishment rules) to jurisdictions where they benefit from lower taxation. 

(c) Social fairness and level playing field among business 

The  revision  of  the  CCCTB  rules  would  ensure  that  digital  activities  are  effectively 
captured  for  tax  purposes  and  remove  certain  competitive  distortions  between  the 
largest companies. It should reintroduce a level playing field between digital and less digital 
companies  applying  the  CCCTB  but  also  between  EU  companies  active  domestically  and 
those  operating  remotely,  which  is  a  pre-requisite  to  the  development  and  growth  of  digital 
start-ups and scale-ups in the EU. By doing so, the adapted CCCTB would better ensure that 
similar  economic  activities  face  similar  tax  obligations,  providing  for  a  more  level  playing 
field. It would also secure the corporate tax base, preventing shifting the tax burden on other 
bases and economic agents.  

Due to its limited scope, it is difficult to implement a structural solution only through the 
CCCTB,  but  it  would  nonetheless  improve  the  perception  of  social  fairness.  In  effect, 
there  would  be  two  completely  different  sets  of  rules  on  taxable  presence  (and  profit 
allocation)  for  companies  falling  under  the  mandatory  application  and  those  outside.  This 

41 In other words, without revision of tax treaties with third countries, one would not expect additional tax base 
from  activities  of  foreign  companies  that  under  current  tax  treaty  rules  are  not  considered  to  have  a  taxable 
presence in at least one Member State. 

37 

 
                                                 
could  make  it  harder  to  seek  structural  solutions  internationally.  It  may  also  raise  new 
competitive  distortions  (Schön,  2017).  Nonetheless,  by  ensuring  that  large  companies  with 
significant digital activities do not escape their taxes in the EU, this adapted CCCTB would 
improve the perception of social fairness in the tax system.  

(d) Fight against aggressive tax planning 

First,  aggressive  tax  planning  through  artificial  avoidance  of  permanent  establishment 
would  be  reduced.  The  new  CCCTB  rules  for  a  digital  permanent  establishment  would 
establish a taxing right based one significant volume of activities in the scope of the proposal 
(to  be  defined).  Key  principles  for  localising  these  activities  could  be  the  destination  of  a 
service – that is, where it is consumed – and the location of the user who has contributed to 
the value creation. Both are difficult for the business to manipulate (and with little interest for 
users to do so). As a result, the digital permanent establishment rules would be effective and 
difficult to avoid. 

Second, the new rules would limit the emergence of new opportunities for aggressive tax 
planning.  To  the  extent  that  the  adapted  rules  pre-empt  Member  States  pursuing  different 
national  responses  to  taxing  digital  activities,  it  would  also  be  effective  in  preventing 
additional  inconsistencies  between  the  different  approaches.  Such  differences  would  only 
further incentivise businesses to engage in aggressive tax planning.  

(e) Economic impacts 

The  macroeconomic  impacts  of  revised  CCCTB  rules  would  be  small.  This  is  mainly 
because  the  number  of  affected  companies  is  small:  these  are  companies  with  global 
consolidated turnover of more than EUR 750 million with significant digital activities in some 
Member States where they do not have a permanent establishment according to current rules. 

The negligible macro-economic impact is confirmed in simulations on the application of 
different  formulas  in  the  CCCTB.  To  simulate  the  effect,  the  CORTAX  model  –  a 
computable  general  equilibrium  model  –  was  used  (see  Annex  4  and  10  for  the 
methodological details). Four alternatives to the currently proposed profit allocation formula 
have  been modelled. All  formulas use  the assumption that digital firms  represent 5%  of the 
economy.42  In  the  first  three  formulas,  a  'digital  input  factor'  was  added  to  the  formula, 

42  The  estimation  of  the  size  of  value  added  from  digital  products  is  challenging  and  no  agreed-upon 
methodology is yet available. Estimates depend on the employed definition of digital economy, for which there 
is  no  broad  consensus.  The  Boston  Consulting  Group  combines  data  from  the  OECD  and  national  statistical 
agencies  to  estimate  an  average  direct  contribution  of  the  digital  economy  to  GDP  in  G20  countries  of  5.1%, 
with a maximum in UK of 10.4% and a minimum in Indonesia of 1.4%. Alternative estimates from consulting 
firms and professional associations (like The Internet Association, which represents the interests of many giant 
companies: Google, Amazon, Airbnb, Salesforce, and many more) point to about 6% of GDP in the U.S. coming 
from purely Web-based businesses. The OECD Internet Economy Outlook 2017  estimates that 5.4% of global 
value added in the OECD area in 2015 directly comes from information and telecommunication (ICT) products 
although this sector encapsulates a wide array of activities going beyond web companies while possibly missing 
significant  major  digital  companies  (for  instance,  Amazon  is  listed  under  the  SIC  code  5961  which  is  not 
included in the OECD definition of ICT). UNCTAD (2017c) estimates that the value added for the EU amounts 

38 

 
 
                                                 
 
affecting  the  apportionment  of  profits  for  the  'digital  companies'  representing  5%  of  the 
economy. The location of digital firm activity by country was proxied using total page views, 
in  relative  terms,  for  the  top  50  web  sites  across  the  EU.  The  fourth  formula  alternative 
models a destinations-based CCCTB by putting all weight for all types of companies on sales 
by  destination.  As  the  detailed  results  presented  in  Table  (1)  of  Annex  10  show,  there  is 
hardly any impact at the macro-level, irrespective of the formula alternative applied. 

(f) Administrative burden and compliance costs 

The  adapted  CCCTB  would  create  limited  additional  administrative  burden  for 
companies  and  administrations  compared  to  the  current  CCCTB  proposal.  Additional 
information  items  are  required,  notably  concerning  the  proxies  identified  to  trigger  a  digital 
permanent  establishment  (for  example,  number  of  active  users,  local  domain  names,  IP 
addresses, location of the accommodation, transport, or entertainment services provision), as 
well as for any new factor added to the profit allocation formula. In some cases, these proxies 
are  already  disclosed  and  used  to  split  revenues  in  the  current  financial  reports  audited  by 
statutory auditors. Overall, only a small increase in the time spent on record keeping, on the 
preparation of tax computation and on dealing with tax authorities is expected. 

Compared to the baseline, in which national administrations would increasingly pursue 
national  solutions,  the  compliance  burden  for  companies  subject  to  the  new  CCCTB 
rules  should  be  lower  overall.  To  the  extent  that  national  measures  would  be  deemed 
necessary  to  capture  activities  outside  the  scope  of  the  proposed  adapted  CCCTB  rules,  the 
compliance  and  administrative  burdens  should  be  broadly  the  same  as  in  the  baseline. 
However, a precise comparison with the baseline scenario is difficult as the assessment would 
depend on which measures would have also been taken in the baseline.  

(g) Coherence with other Commission policies and global tax agenda 

A digital CCCTB would fall within the ambit of the Commission’s initiatives for fairer 
taxation.  It  would  contribute  to  the  elimination  of  obstacles  which  create  distortions  that 
impede  the  proper  functioning  of  the  single  market.  On  this  premise,  it  is  largely 
complementary to the EU-level legislation in company law and broadly fits with projects such 
as  the  digital  single  market  and  the  several  initiatives  in  tax  transparency,  the  exchange  of 
information and anti-money laundering. 

A solution focussing exclusively on revisions to the CCCTB would have limited potential 
to have a positive impact on the global tax agenda.  Effectively, the EU would apply two 
completely  different  sets  of  rules  on  taxable  presence  (and  profit  allocation)  for  companies 
falling under the mandatory application and those outside. This would make it harder to seek 
structural solutions internationally.  

to 4.3%.  Taking stock of the lack of a consensus definition of the digital economy and absent any data more 
dependable than these, 5% looks like a reasonable estimate that is employed in the CORTAX simulations. 

39 

 
 
                                                                                                                                                         
1.11.2  Option  2  -  Wide  scope:  Directive  on  digital  permanent  establishment  (plus  adapted 

CCCTB) 

The  separate  Directive  would  have  a  wide  scope.  Most  notably,  the  mandatory  global 
turnover  threshold  of  EUR  750  million  applicable  to  the  CCCTB  would  not  apply.  In 
addition, the adoption of the directive would not require Member States to agree on the new 
rules in a package with all other rules laid down in the CCCTB. This could make for a faster 
adoption of the new rules. 

Example  

Both companies X and Y from the previous examples (Option 1), established in Member State 
A  –  and  providing  digital  services  would  in  principle  fall  under  the  scope  of  the  directive, 
irrespective of their global turnover. As for Option 1, the question whether the new rules lead 
to  an  additional  digital  permanent  establishment  in  Member  State  B  would  depend  on  their 
respective  economic  presence  (i.e.,  whether  it  exceeds  the  applicable  digital  activity 
thresholds). As for option 1, the new rules would not apply to company Z established outside 
the EU but performing digital activities in Member State B assuming that the applicable tax 
treaty  between  Member  State  B  and  country  Z  overrules  Member  State  B's  new  digital 
permanent establishment rules.    

a) Integrity of the single market 

Due  to  its  general  scope,  the  Directive  would  have  a  stronger  positive  impact  on  the 
integrity of the single market than the narrower Option 1. The revision of the rules would 
ensure that digital activities are effectively captured for tax purposes. Once agreed, it would 
remove  incentives  for  unilateral  action  at  Member  State  level.  It  would  reintroduce  a  level 
playing  field  between  digital  and  less  (or  non-)digital  companies  active  domestically  and 
those operating remotely, and not only for the largest players. By containing the risk of future 
unilateral actions, Option 2 would ensure a single and certain framework for the allocation of 
taxing  rights  and  allocation  of  profits  across  EU  Member  States,  which  would  support  the 
development and growth of digital start-ups and scale-ups in the EU. 

b) Sustainability of public finances 

Implemented  together,  the  changes  in  permanent  establishment  and  allocation  rules 
would  grant  Member  States  taxing  rights  and  tools  for  profit  attribution  that  reflect 
digital  presence.  As  such  it  would  correct  the  existing  misalignment  of  taxation  and  value 
creation and contribute to a fairer distribution of tax revenue within the EU. 

Due  to  the  wider  scope  of  this  option  and  its  better  effectiveness  in  fighting  aggressive 
tax planning the impact on public finances is expected to be somewhat larger than for 
the  narrower  Option  1.  The  CCCTB  already  captures  a  large  share  of  the  turnover  by 
multinational  companies  and  is  likely  to  capture  those  largest  digital  players  that  are  most 

40 

 
relevant for public finances in individual Member States.43 However, the wider scope option 
is  considered  to  be  more  effective  in  the  fight  against  tax  planning  (see  (d)  below), 
contributing to additional tax revenue from other companies (not falling under the mandatory 
scope of the CCCTB). 

(c) Social fairness and level playing field among businesses 

Figure (3) below illustrates for 5 sample companies the mismatch between the location of 
their  users  and  the  current  place  of  taxation.  It  clearly  demonstrates  the  current 
misalignment  between  profit  tax  base  and  places  where  users  contribute  to  the  value  of  the 
services offered. The maps are based on data of five sample companies. Web visits are used 
here  as  proxy  for  the  geographical  location  of  users  and  their  contribution  to  the  value 
creation process of web services. They are contrasted against the location of profits of these 
five companies.  

Figure (3): Comparison of the geographical allocation of web visits (left-hand side) and 
profit (right-hand side), for five large web companies 

Source:  European  Commission  Joint  Research  Centre,  based  on  Bureau  van  Dijk  Orbis  database  (2016)  and 
SimilarWeb  (2016,  www.similarweb.com)).  Legend:  geographical  allocation  of  web  visits  (left-hand  side); 
profits (measured as EBITDA = Earnings before interest, taxes, depreciation and amortisation, right-hand side).  

The revision of the rules would ensure that all digital activities are effectively captured 
for tax purposes and remove competitive distortions. The additional criteria suggested for 
profit attribution in the Directive are targeted to capture more value where the users are based 
and data are collected and processed. By doing so, the adapted rules would better ensure that 
similar economic activities face similar tax obligations. As said above, this would reintroduce 
a level playing field between digital and less (or non-) digital companies, as well as between 
firms active only domestically and those operating remotely. It is also necessary to create fair 
competition between small and large players, which is a pre-requisite to the development and 
growth  of  digital  start-ups  and  scale-ups  in  the  EU  competing  with  large  multinational 

43 See discussion on the impact on public finances for Option 1 above. 

41 

 
 
 
 
                                                 
players.  It  would  also  secure  the  corporate  tax  base  and  prevent  undue  tax  burden  on  other 
bases and economic agents.    

By  ensuring  that  large  companies  with  significant  digital  activities  do  not  escape  their 
taxes  in  the  EU  (see  next  subsection),  the  directive  would  improve  the  perception  of 
social fairness in the tax system. It can be expected to have a positive impact on taxpayer 
morale and improve trust in the functioning of the tax systems more generally.  

(d) Fight against aggressive tax planning 

In  addition  to  the  positive  impacts  of  the  narrow  scope,  which  would  remain  valid, 
under the wide scope, companies would have less possibilities to shift profits out to third 
countries.  As  it  will  become  significantly  more  difficult  to  artificially  attribute  profits  to 
some  specific  jurisdiction,  it  will  also  become  more  difficult  for  companies  to  shift  profits 
outside  the  EU  through  treaty  shopping.  This  practice  is  wide-spread  and  involves  shifting 
profits to EU jurisdictions that do not apply source taxation on outbound payments.  

(e) Economic impacts 

For the same reasons as for Option 1, the economic impacts are considered to be small 
but  could  become  larger  over  time  as  the  digital  economy  grows.  Still,  the  positive 
economic impact is arguably larger than in Option 1. This is due to the wider scope of Option 
2, which results in an expected more effective preservation of the single market, as it offers a 
more  structural  solution  (preventing  additional  unilateral  measures)  and  implies  one  single 
system within the EU for permanent establishment rules. Moreover, this option is considered 
to be more conducive to arriving eventually at a global solution, which would be the one best 
suited to ensuring a level playing field within the EU and vis-à-vis third countries. 

(f) Administrative burden and compliance costs 

In  the  first  instance,  the  adapted  rules  would  create  an  additional  compliance  cost  for 
companies  and  administrative  burden  for  administrations.  Additional  compliance 
activities are required in relation to new permanent establishments triggered in Member States 
where  companies  had  not  been  taxpayers  before.  This  implies  dealing  with  additional  tax 
administrations,  though  this  can  be  avoided  by  opting  for  the  CCCTB.44  In  addition, 
companies  also  need  to  collect  and record information  on  the  proxies  identified  to  trigger  a 
digital establishment and allocate profits to it (for example, number of active users or location 
of  the  accommodation,  transport,  or  entertainment  services  provision).  The  vast  majority  of 
companies with an online user base have access to this information and some of these proxies 
are  already  disclosed  and  used  to  split  revenues  in  the  current  financial  reports  audited  by 
statutory  auditors.  Overall,  only  small  increases  are  expected  in  the  time  spent  on  record 
keeping, on the preparation of tax computation and on dealing with tax authorities. 

44 The administrative burden and compliance costs of the CCCTB have been described in the impact assessment 
of the CCTB and CCCTB (see SWD(2016) 341 final). 

42 

 
 
 
                                                 
Compared to the baseline, in which national administrations would increasingly pursue 
national solutions, the compliance burden for companies subject to the new rules should 
be  lower  overall.  The  requirements  would  be  harmonised  in  the  EU  whereas  they  can 
critically  differ  across  Member  States  if  national  solutions  are  implemented  in  an 
uncoordinated way. Thus in comparison to a situation where countries increasingly implement 
national measures to tax digital activities, the compliance burden for companies in the digital 
economy would be reduced.  

 (g) Coherence with other Commission policies and global tax agenda 

The revised rules on digital permanent  establishment  and profit  attribution  within the 
new Directive and the adapted CCCTB would fall within the ambit of the Commission’s 
initiatives  for  fairer  taxation.  It  would  contribute  to  the  elimination  of  obstacles  which 
create distortions that impede the proper functioning of the single market. On this premise, it 
is  largely  complementary  to  the  EU-level  legislation  in  corporate  taxation  and  broadly  fits 
with  projects  such  as  the  digital  single  market  and  progress  achieved  in  the  areas  of  tax 
transparency, exchange of information and anti-money laundering. 

Offering  a  pragmatic  and  flexible  approach  is  an  important  aspect  if  the  EU  wants  to 
make progress and thereby also push progress internationally. To do so, the proposal for 
the long-term should both reflect what the EU would like to see internationally, but also be 
easy to align to any eventual international solution. This will require a careful approach. The 
more specific the EU provisions are, the more difficult will be an alignment with a subsequent 
global  agreement.  Therefore,  the  approach  should  be  quite  broad  and  flexible,  while  still 
providing Member States with a solid base to tax digital activity. 

1.12 Option 3: Realigning profit allocation rules with value creation intra-
EU and recommendation to change rules vis-à-vis third countries 

The differential impact compared to Option 2 stems from its potential application vis-à-
vis  third  countries,  which  would  ensure  a  more  level  playing  field.  An  update  of  all 
bilateral treaties between Member States and third countries takes time and requires also the 
willingness  of  all  involved  parties  to  follow  the  recommended  approach.  The  main  benefit 
would  be  in  also  covering  digital  activity in  the  EU  of  companies  that  are  currently  not  tax 
residents anywhere in the EU. An examination of Orbis firm level data on affiliates of the set 
of 112 large digital companies shows that at least 75% of them have at least one affiliate in 
the  EU.  For  the  remaining  25%,  there  is  no  information  in  Orbis,  but  this  does  not  exclude 
that they are present in the EU. Thus, the immediate impact of an application also vis-à-vis 
third  countries  might  be  small.  The  important  effect  is  that  it  would  provide  for  a  level-
playing field between EU and third-country companies. Compared to Option 2, it would also 
avoid any disincentives to become a tax resident in the EU. As such, it would also provide for 
a  stronger,  more  positive  impact  on  public  finances  and  be  overall  fairer.  Since  it  is  not 
possible  to  anticipate  which  countries  will  update  their  treaties,  and  by  when,  the  possible 
positive effects of the recommendation are only very generally taken into account. 

43 

 
 
Example 

The  examples  for  companies  X  and  Y  established  in  the  EU  are  the  same  as  for  Option  2.  
Company  Z,  established  in  a  third  country  C  and  carrying  out  digital  activities  in  Member 
State  B,  may  be  subject  to  the  new  rules  if  third  country  C  and  Member  State  B  have 
renegotiated their respective bilateral tax treaty accordingly. 

1.13 Type and level of digital activities  

Material scope 

Activities involving the supply of physical goods are relatively less problematic and have 
been dealt with to a larger degree through anti-abuse rules. First, these activities tend to 
have a balanced international footprint as they often require local physical infrastructure – the 
international footprint of online retailers is 0.9 (see Figure 2 in Annex 5). Second, relatively 
more progress  has  been  made  within the OECD  Base Erosion and Profit  Shifting  project in 
addressing  issues  in  this  area,  notably  through  the  measures  that  make  the  permanent 
establishment  rules  robust  against  commissionaire  arrangements.45  Note  that  excluding  the 
supply of physical goods does not mean that platforms charging fees for facilitating the trade 
of  physical  goods  would  be  excluded.  These  platforms  charge  fees  for  a  digital  service.  It 
means, however, that the underlying sale of the physical good would not be within the scope. 

The  comprehensive  solution  should  not  ring-fence  the  digital  economy  but  directly 
address  its  novel  characteristics  through  a  holistic  approach  that  does  not  require 
singling  out  certain  activities.  Many  of  the  stakeholders  that  replied  to  the  Commission's 
open  public  consultation  have  made  that  point  very  clearly:  "there  is  no  such  thing  as  the 
digital  economy.  The  global  economy  is  digital  and  should  be  treated  as  such  for  tax 
purposes"46.  

The  new  rules  should  proportionately  address  the  current  mismatch  between  taxation 
and  value  creation.  To  the  extent  that  the  comprehensive  solution  can  accommodate  in  its 
profit allocation rules the different degrees of contribution of digital factors to the process of 
value creation, the scope for the comprehensive solution can be defined broadly to include all 
digital services. A definition of digital services for the purposes of a revenue threshold could 
be  inspired  by  the  definition  of  electronically  supplied  services,  which  exists  for  VAT 
purposes.47 This would entail covering a broad range of digital services.  

Digital activity thresholds 

Ideally the digital activity thresholds should be defined in a way to  

45 Notably, activities around local warehouses no longer benefit from the specific activity exemption commonly 
included in the definition of a permanent establishment, unless they are preparatory and auxiliary in nature. 
46 Opinion expressed in one of the position papers that were sent to the open public consultation. 
47  'Electronically  supplied  services'  include  services  which  are  delivered  over  the  Internet  or  an  electronic 
network  and  the  nature  of  which  renders  their  supply  essentially  automated  and  involving  minimal  human 
intervention, and impossible to ensure in the absence of information technology (Article 7 of VAT Implementing 
Regulation). 

44 

 
                                                 
a)  Cater  for  different  type  of  business  models  -  Digital  business  models  are  very 
heterogeneous. Some might rely on online contracts, while others do not. Some might 
have a very large user base while others might have a smaller user base, but still have 
significant user contributions as each individual user contributes a large value (users 
that produce content like videos or computer programs); 

b)  Ensure that trivial cases are not covered and that the compliance cost for dealing 
with  an  additional  permanent  establishment  is  safely  covered  by  the  profits 
generated 
the 
proportionality of the proposed measure; and 

the  permanent  establishment.  This 

important  for 

through 

is 

c)  Ensure a comparable treatment in different Member States, irrespective of their 

size. 

A  number  of  different  types  of  activity  thresholds  have  been  proposed,  notably  in  OECD 
(2015a) and Brauner and Pistone (2017) and Hongler and Pistone (2015). The thresholds most 
often discussed relate to: 

  Revenue earned from customers/users in the jurisdiction 
  Number of users (based on a concept of 'monthly average users'): A user is defined as 
any individual or business that registers, logs on or visits a company's digital platform. 
  Number  of  online  contracts  (agreements  to  terms  of  service):  Online  contracts  are 
defined  as  legally  binding  agreements  concluded  by  accepting  (through  'clicks')  the 
'terms of service' of the digital service provider.  

The  OECD  (2015b)  and  Hongler  and  Pistone  (2015)  envisage  to  apply  the  revenue 
threshold  in  combination  with  other  thresholds  (Option  b3),  but  this  option  does  not 
deal effectively with business models that operate through indirect revenue generation. 
Proportionality is a strong rationale for the application of a revenue threshold. However, the 
advantage  of  an  alternative  application  of  all  thresholds  (Option  b1)  is  that  it  also  deals 
effectively with respect to the advertising business model that generates revenue not directly 
from  its  users  but  indirectly  through  sales  to  third  parties.  Option  b2  has  the  same 
disadvantage as Option b3 and has the additional disadvantage that a cumulative application 
of all thresholds could result in a very narrow scope and is not suitable to capture effectively 
different  types  of  business  models.  For  example,  some  businesses  do  not  apply  any  online 
contracts and the new rules would hence be of no consequence to them.  

To  ensure  proportionality  of  the  measure  while  operating  alternative  thresholds,  it  is 
essential to set each threshold sufficiently high to safely exclude small cases that would 
not  even  cover  the  tax  compliance  cost  for  a  permanent  establishment.  Brauner  and 
Pistone (2017) propose to make the thresholds flexible for countries to account for significant 
differences between countries, their geographical dimensions, the size of their economies, the 
number  of  inhabitants  and  other  persons  legally  established  on  their  territory,  the  criteria 
based  on  the  number  of  users  and  the  overall  revenue  are  determined  in  a  flexible  way. 
However, if the main aim for setting each threshold is to ensure significant economic activity 

45 

 
 
and that compliance cost would be covered by the corresponding profits, it is more natural to 
apply absolute thresholds.  

The starting point for setting the revenue threshold are the estimated costs for operating 
an  additional  permanent  establishment.  A  conservative  estimate  (based  on  Annex  VII  of 
the impact assessment accompanying the 2016 CCCTB proposal) puts this figure at 0.55% of 
turnover (or EUR 128 000 on average) per year for medium-sized enterprises and at 0.23% of 
turnover (or EUR 141 000 on average) for large enterprises. A recent study on tax compliance 
costs (KPMG and GFK, 2018), points to estimates for direct taxes overall of 0.2% of turnover 
for medium-sized enterprises and 0.7% for large enterprises (although this estimate is subject 
to large uncertainty). For small enterprises the estimated amount is 0.9% of turnover.  

If compliance costs are indeed proportional to turnover, then even with a profitability of 
only  1%,  (which  is  well  below  of  what  we  typically  see  for  digital  companies), 
compliance  costs  should  be  safely  covered.  However,  it  is  likely  that  there  are  substantial 
fixed  compliance  costs  (that  arise  from  the  start  and  independent  from  the  amount  of 
turnover).  A  conservative  assumption  is  that  only  transfer  pricing  documentation  is 
proportional to turnover whereas all other costs are fixed. This would give average fixed costs 
of  EUR  80  000  for  a  medium-sized  enterprise  and  EUR  87  000  for  a  large  enterprise  (see 
detailed split of costs in the tables provided in Annex 3). A company with turnover of EUR 5 
million  and  profitability  of  2%,  would  cover  these  costs.  A  threshold  of  EUR  10  million 
would allow for scenarios of even lower profitability and would be in line with the threshold 
for small enterprises in the EU.  

To  set  the  threshold  on  the  number  of  users,  data  for  the  revenue  per  user  is 
informative. Estimates for a range of different types of digital services48 give the following 
average  revenue  per  user  in  Europe49:  social  media  advertising  USD  1550,    ride  sharing 
services USD 47, dating services USD 22, hotel rental services USD 47. Revenue per user in 
search  advertising  (the  largest  category  in  online  advertising)  is  estimated  at  USD  13  for 
mobile users and USD 32 for desktop users in Europe in 2016.51 In order to get a similar value 
of  threshold  in  monetary  terms  as  with  option  (i),  the  appropriate  threshold  of  number  of 
users, if applied alternatively to the revenue threshold, could be 50 000 - 100 000. In that case, 
the average revenue triggering the threshold would range from approximately USD 750 000 
for 50 000 users and revenue per user of USD 15 (corresponding to approximately EUR 680 
00052) to USD 4 700 000 for 100 000 users and USD 47 per user (EUR 4 250 000). Even if 
these numbers are somewhat lower than for the revenue threshold, this is justified as the data 
available often underestimates actual user figures (based on a comparison with data supplied 
by individual companies). Moreover, the user thresholds only become relevant in the case of 

49 Based on data published by Statista. 
50 Revenue per user in social media advertising is estimated at USD 16 for mobile users and USD 6 for desktop 
users, with an average of 15 (due to the bigger weight of mobile users): 
https://www.statista.com/download/outlook/whiterpaper/Fullpage/2/220/102/2_220_102.pdf 
51 https://www.statista.com/download/outlook/whiterpaper/Fullpage/2/219/102/2_219_102.pdf 
52 Based on the 2016 annual average USD-EUR exchange rate of 1.11 (AMECO database). 

46 

 
                                                 
 
indirect  revenue  generation,  which  typically  either  involves  advertising  models  or  at  least 
large user bases. 

There  is  a  high  variability  in  the  type  and  value  of  the  contracts,  depending  on  the 
business model. Moreover, also the acceptance of 'terms of service' for the use of an online 
platform could be assimilated to the conclusion of a contract53. If so, a high threshold, very 
similar to the one of the user would be needed. In any case, anybody who agrees to the 'terms 
of  service'  would  also  be  counted  as  a  user.  If  relevant  for  the  business,  the  acceptance  of 
'terms of service' could be accepted as a way to measure number of users for a digital service 
rather  than  a  threshold  per  se.  An  alternative  threshold  on  the  contracts  concluded  locally 
could have an added value if it is about business-to-business contracts. For example, a cloud-
computing  service  might  have  relatively  few  'users'  if  it  offers  its  services  primarily  to 
businesses  customers,  but  each  contract  concluded  with  such  a  business  customer  would 
typically  generate  more  revenue  than  revenue  generated  form  a  single  user  that  is  a  natural 
person. Therefore, a threshold on business-to-business contracts should be considerably lower 
than a user-based threshold.   

1.14 Impact on small and medium-sized enterprises 

No direct impact is expected on small enterprises, whereas there might be some impact 
on  medium-sized  enterprises.  Option  1  applies  mandatorily  only  to  companies  with 
consolidated turnover above EUR 750 million and therefore affects directly only the largest 
companies. Due to the application of the digital activity thresholds, the vast majority of small 
enterprises  would  not  be  affected  by  options  2  and  3.  Medium-sized  companies  might  fall 
under  the  scope.  However,  additional  permanent  establishments  would  be  triggered  only  in 
cases of companies being active in at least two countries. The type of company that triggers 
additional permanent establishments can reasonably be expected to exceed the thresholds for 
medium-sized  enterprises.  In  any  case,  a  mitigating  factor  would  be  the  availability  of  the 
CCCTB,  which  affected  companies  could  opt  for  and  thereby  mitigate  their  compliance 
burden. However, since regulatory and compliance burden may hurt small and medium-sized 
enterprises to a stronger extent, this burden will have to be monitored to assess whether such 
firms are disproportionately impacted.  

The comprehensive option is expected to improve the level-playing field for small- and 
medium sized companies. It would provide for a more coherent digital single market in the 
future,  which  would  in  particular  benefit  small  and  medium-sized  companies.  Notably,  it 
would  improve  the  level-playing  between  large  multinational  digital  players  and  smaller 
companies that are active cross-border less often (and have fewer tax planning opportunities). 
A  modern  and  stable  tax  framework  for  the  digital  economy  will  set  the  conditions  to 

53 See for example the OECD (2015a): Final Report p.110: "online platforms providing free services to their 
users often specify on their websites that by accessing or using the products and services of the company the user 
agrees to the “Terms of Service” and each use of the platform results in the conclusion of a legally binding 
agreement." 

47 

 
 
                                                 
stimulate  innovation,  tackle  market  fragmentation  and  allow  small  domestic  businesses  to 
become global players.  

7. HOW DO THE COMPREHENSIVE OPTIONS COMPARE? 

Table  (4)  summarises  the  assessment  presented  in  section  6.  All  comprehensive  policy 
options are considered to be to some degree effective in achieving the various objectives set 
out for this initiative. In terms of potential costs, Option 1 might bring additional burdens as it 
is possible Member States would still take unilateral actions in the future. Overall, Option 1 is 
considered to be only moderately effective in achieving the objectives. At the same time, the 
economic impacts expected are minor and it does not provide a coherent approach for the EU 
to put forward for a global solution. Options 2 and 3 are considered to be similarly effective in 
achieving  the  objectives  of  this  initiative.  Option  3  is,  however,  more  effective  due  to  its 
stronger  impact  on  a  more  level  playing  field  and  fight  against  tax  planning.  This  effect  is 
difficult to evaluate as one would have to anticipate how many Member States would follow 
the  recommendation  to  revise  their  tax  treaties  with  third  countries.  However,  Option  3  is 
considered  to  be  the  one  with  the  largest  coherence,  notably  by  providing  a  viable  path 
towards a global solution to the problem. 

Table  (4):  Comparison  of  effectiveness,  efficiency  and  coherence  of  comprehensive 
options 

Option 1 

Option 2 

Option 3 

Intra-EU - narrow 
scope: Adjustments 
to the CCCTB rules 

a) Integrity of the Single market 

Weak 

Intra-EU - wide scope: 
Directive on new 
permanent establishment 
and profit allocation 
principles + adjustments 
to the CCCTB rules 
Medium/Strong 

Intra-EU - wide 
scope + 
recommend 
application vis-
à-vis third 
countries 
Strong 

b) Sustainability of public finances 

Medium 

Medium/Strong 

Medium/Strong 

c) Social fairness and level-playing 
field 

d) Fight against aggressive tax 
planning 

e) Economic impacts 

f) Admin burden and compliance 
costs 

g) Coherence with EU and global 
tax agenda 

Source: European Commission own analysis 

Weak 

Strong 

Strong 

Medium 

Medium 

Medium/Strong 

+ 

+ 

+ 

+ 

+ 

++ 

neutral 

- 

neutral 

48 

 
 
 
  
 
A proposal for a digital presence in the EU is the preferred approach for more than half 
of the respondents to the stakeholder consultation. Table (5) summarises the stakeholders' 
preferences  for  the  comprehensive  solutions  (see  Annex  2  for  more  details).  The  preferred 
option coincided for both groups of stakeholders: 14 out of 21 national tax authorities as well 
as  58%  of  the  446  respondents  to  the  open  public  consultation  believe  that  the  'digital 
presence in the EU' proposal can best address the current problems related to the international 
taxation  rules  for  the  digital  economy.  Stakeholders  were  not  asked  explicitly  on  their 
preferred approach vis-à-vis third countries. 

Including only digital services in the material scope (Option a2), and not the online sale 
of goods, accompanied by appropriate digital activity thresholds, would be required for 
a proportionate approach. This is because activities involving the supply of physical goods 
are relatively less problematic and have been dealt with to a larger degree through anti-abuse 
rules. In terms of the digital activity thresholds, setting them in an alternative way (Option b1) 
would  ensure  capturing  important  cases  where  indirect  revenue  generation  is  the  norm.  To 
exclude cases of unjustified compliance burden, a local revenue threshold in the range of EUR 
5-10 million and a user threshold in the range 50-100 thousand would be appropriate. 

Table (5): Summary of stakeholder views on comprehensive policy options 

Option name 

For 

Against 

No opinion 

Long term, comprehensive solutions  
Modify the Common 
Consolidated Corporate Tax 
Base proposal 

44 % of respondents 

9 states 

'Digital presence in the EU' 
proposal 

Destination-based corporate tax 

Unitary tax 

Residence tax base with 
destination tax rate 

58 % of respondents 

14 states 
54 % of respondents 

6 states 
50 % of respondents 

6 states 
28 % of respondents 

1 state 

Source: European Commission stakeholders consultation results 

27% of 
respondents 
9 states 

28% of 
respondents 
5 states 
34% of 
respondents 
12 states 
37% of 
respondents 
13 states 
53% of 
respondents 
17 states 

29% of 
respondents 
3 states 

14% of 
respondents 
2 states 
12% of 
respondents 
3 states 
13% of 
respondents 
2 states 
19% of 
respondents 
3 states 

8. PREFERRED COMPREHENSIVE OPTION 

1.15  Description of the preferred comprehensive option 

Overall, and given the lack of significant progress at international level on the issues at 
the root of the problem, ensuring a coordinated EU approach seems warranted (i.e., 'no 
action'  is  not  the  preferred  option).  A  coordinated  approach  would  prevent  further 
fragmentation of the single market, prevent future complexity and administrative burden for 

49 

 
 
 
digitalised businesses and would provide companies with a certain degree of certainty about 
the way they will be taxed in the future. 

As there is little appetite for fundamental reform options, Option 3 is the most effective 
option to achieve the objectives and with the best efficiency and coherence properties. It 
offers  a  structural  solution 
the 
recommendation it would emphasise the need for solutions beyond EU borders, providing the 
ground for the EU contribution to the work at OECD and global level. 

identified  problems 

intra-EU,  and 

through 

the 

to 

The preferred comprehensive option has two elements: a Directive, which should be included 
in the CCCTB negotiations, and a Recommendation. 

1. Directive on digital permanent establishment and profit allocation rules, which should be 
included in the Common Consolidated Corporate Tax Base (CCCTB) negotiations. 

The Directive would establish common rules for a digital permanent establishment and 
for  allocating  profits  to  digital  activities  of  such  permanent  establishments.  Member 
States  would  have  to  implement  the  provisions  of  this  Directive  in  their  national  corporate 
income tax framework. The principle of the Directive entails the application of a corporate tax 
on profits resulting from providing digital services in the EU.  Within the EU, a taxing right 
would  be  triggered  through  a  digital  permanent  establishment,  if  it  exceeds  certain  digital 
activity  thresholds.  These  thresholds  would  be  applicable  at  Member  State  level  and  apply 
alternatively, based on either realised revenues from digital services (broadly defined) of EUR 
5-10 million, or the number of active users of digital services of 50 000 – 100 000 or possibly 
also  the  number  of  online  contracts  concluded.  A  definition  of  digital  services  for  the 
purposes of the revenue criterion could be inspired by the definition of electronically supplied 
services,  which  exists  for  VAT  purposes54.  Considering  that  in  the  digital  economy,  a 
significant  part  of  the  value  of  a  business  is  created  where  the  users  are  based  and  data  is 
collected  and  processed,  additional  criteria  specifically  and  exclusively  targeted  at  these 
aspects  would  be  added  to  profit  allocation  principles.  Member  States  would  continue  to 
apply  their  national  corporate  income  tax  rules  with  respect  to  the  profits  attributable  to  a 
digital permanent establishment in their jurisdiction.  

Once agreed, the new digital permanent establishment concept should be reflected in the 
CCCTB, along with an adapted formula. The new rules on permanent establishment could 
be  directly  inserted  in  the  CCCTB.  To  adapt  the  formula  in  the  spirit  of  the  agreed  new 
principles  for  attributing  profits,  the  formula  could  be  amended  by  a  factor  that  reflects  the 
user contribution to the value creation.  

54  'Electronically supplied services' shall include services which are delivered over the Internet or an electronic 
network  and  the  nature  of  which  renders  their  supply  essentially  automated  and  involving  minimal  human 
intervention,  and  impossible  to  ensure  in  the  absence  of  information  technology  (Article  7  of  VAT 
Implementing Regulation).  

50 

 
 
                                                 
2.  Recommendation  to  Member  States  to  implement  digital  permanent  establishment  and 
profit allocation rules in their double tax treaties.  

To  address  situations  involving  third  countries  in  a  way  that  does  not  violate Member 
States  tax  treaties,  Option  3  involves  a  Commission  recommendation  setting  out  the 
proposed changes to the double taxation treaties. To facilitate the required renegotiation of 
double tax treaties, the Commission would issue a recommendation setting out the proposed 
changes  to  the  double  taxation  treaties  of  Member  States  in  relation  to  Article  5  Permanent 
Establishment  and  Article  7  Business  Profits  of  the  OECD  Model  Tax  Convention.  To 
complement  the  recommendation,  the  Commission  could,  without  prejudice  to  the  EU  and 
Member States' competences, assist Member States in the negotiation of these provisions with 
selected third countries in a coordinated manner at the Union level, if authorised to do so by 
the Council. 

1.16 Administrative burden and compliance costs 

In  principle,  all  business  sizes  could  be  affected  by  the  additional  tax  compliance 
burden,  but  the  digital  activity  thresholds  make  an  application  for  the  smallest 
companies  unlikely.  The  preferred  solution  could  therefore  also  cover  relatively  smaller 
businesses  that  have  a  sufficiently  large  digital  footprint  in  Member  States  where  they  are 
currently not established.  

In a first step, all companies carrying out digital activities in an EU Member State where 
they are not already tax resident or have a permanent establishment have to determine 
whether  they  exceed  the  digital  activity  thresholds.  This  would  involve  determining  the 
type of digital activities falling under the scope of the comprehensive solution and their level 
in  a  given Member  State,  such  as  the  revenue  derived  from  that  activity  and the number  of 
active users. This would require splitting revenues issued from the relevant digital activities 
with  revenues  from other  activities and identifying  the number of active users of the  digital 
service in a Member State in a tax year. However, the additional burden of collecting the data 
should be rather limited given the availability of the information (see section 9.3.9). 

In  a  second  step,  businesses  would  face  a  one-off  costs  to  set  up  reporting  for  new 
permanent  establishments  as  well  as  recurrent  tax  compliance  costs.  Given  the  level  of 
the digital activity thresholds (which would effectively exclude small enterprises), estimates 
of recurrent costs of an additional subsidiary of a large or medium-sized parent can be a basis 
for  estimation.  In  the  impact  assessment  accompanying  the  2016  proposal  for  a  CCCTB55, 
Deloitte  estimated  that  under  a  situation  with  different  tax  codes  in  Member  States,  the 
additional recurrent compliance costs for a large representative parent investing in a medium 
sized subsidiary amounts to 0.23% of turnover, while for a medium parent this ratio more than 
doubles to 0.55% of turnover. These figures amount to on average roughly EUR 141 000 and 
128  000  respectively,  calculated  from  the  estimated  compliance  time  (detailed  tables  are 

55 SWD(2016) 341 

51 

 
                                                 
provided  in  Annex  3).  The  two  biggest  cost  items  are  for  the  required  transfer  pricing 
documentation and for dealing with the tax authorities.  

For  companies  within  the  mandatory  scope  of  the  CCCTB  or  opting  to  apply  the 
CCCTB,  the  additional  compliance  burden  would  be  considerably  lower.  Due  to  the 
elimination or reduction of transfer pricing related compliance tasks, and of those related to 
contacts with tax authorities, an average decrease in total additional compliance time of 70% 
can be expected if the additional cross-border investment is made under the CCCTB regime.56 
This results in a reduction of compliance costs of 62% for a group with a large parent and of 
67% for a group with a medium-sized parent.57 Companies outside the scope of the CCCTB 
would also have the possibility to opt in. 

National  tax  administrations  would  also  incur  costs  for  implementing  the  new  system. 
Costs arise notably for the need of upgrading IT systems and for staff training to be able to 
attribute  profits  to  the  permanent  establishment  and  to  reflect  the  digital  activities  in  that 
Member State. The implementation of the CCCTB should already provide a solid framework 
for the tax administration on which to rely on. There will also be a need to coordinate in the 
EU  the  uniform  implementation  and  practical  application  of  the  new  rules.  Since  the 
comprehensive  solution  would  not  apply  for  all  firms  and  in  case  the  interim  solution 
continues to run in parallel where the comprehensive solution is not in place, the burden for 
national administrations may overall go up slightly due to the required maintenance of parallel 
systems.  National  tax  administrations  may  also  face  additional  costs  for  negotiating  double 
tax treaties. 

1.17 Subsidiarity and proportionality of the preferred option 

The  preferred  solution  is  in  line  with  the  general  understanding  of  the  subsidiarity 
principle.  The  nature  of  the  subject  requires  a  common  initiative  across  the  single  market. 
The  preferred  solution  outlined  in  this  document  aims  to  provide  a  common  framework  for 
the taxation of cross-border digital activities in Member States' national corporate tax systems 
in a coordinated manner. Such aims cannot be sufficiently achieved through action undertaken 
by each Member State while acting on its own. Such an approach would in fact only replicate 
and possibly worsen the existing fragmentation in the single market and perpetuate the present 
inefficiencies  and  distortions  in  the  interaction  of  a  patchwork  of  distinct  measures.  If  the 
objective is to adopt solutions that function for the single market as a whole, the appropriate 
way  forward  involves  coordinated  initiatives  at  the  level  of  the  EU.  Furthermore,  an  EU 
initiative  would  add  value,  as  compared  to  what  a  multitude  of  national  implementation 
methods  can  attain.  Finally,  if  the  rules  on  the  taxation  of  digital  activities  are  enacted 
according to the acquis, taxpayers would have the legal certainty that they comply  with EU 
law.  

The individual results by country-pairs range between 11% to 91% savings in additional compliance 

56 
time. 
57 
spent by external advisors that generally have higher costs per hour than the internal workforce. 

Deloitte's tax experts expect that the group led by a medium parent can realise more savings on time 

52 

 
                                                 
The  measures  to  be  taken  under  the  present  initiative  are  both  suitable  and  necessary 
for  achieving  the  desired  end  (i.e.  proportionate).  The  preferred  solution  outlined  in  this 
document does not imply a harmonisation of corporate tax rates in the EU and, therefore, it 
does not restrict Member States' capability to influence their desired amount of corporate tax 
revenues.  It  does  not  interfere  with  national  choices  in  terms  of  the  size  of  public  sector's 
intervention  and  composition  of  tax  revenues.  It  proposes  a  more  efficient  way  to  tax  the 
digital activities of companies operating in the EU to secure a more efficient single market. 
Appropriate  digital  activity  thresholds  ensure  that  the  additional  compliance  burden  from 
creating additional permanent establishments is limited to non-trivial cases, where companies 
are likely to cover the costs from the local profits.  

9. INTERIM SOLUTION 

For the interim solution, the general objectives remain the same, but the specific objective is 
to create a tax targeting digital business models that is easy to implement  and improves the 
level-playing field and fair taxation in the interim period until the comprehensive solution is 
implemented. 

1.18 What is the baseline against which the interim solution is assessed? 

Even though there is only one set of baseline assumptions (as set out in section 5.1), there 
are some relevant considerations when assessing the interim solution and the possibility 
of taking no action. Notably, it is taken as given that the preferred comprehensive solution 
will  eventually  replace  the  interim  solution.  This  implies  that  each  of  the  interim  solutions 
will be assessed against a scenario, in which the preferred comprehensive solution is not yet 
in place and neither would be the CCCTB, as it was proposed in 2016. However, since most 
provisions  of  the  Anti-Tax  Avoidance  Directive  will  be  applied  as  of  1  January  2019,  the 
assumption is that this directive applies in the baseline.  

It is not possible to concretely anticipate not yet specified unilateral measures, but there 
is a clear risk that unilateral measures will keep expanding in the near future. Although 
specific indirect taxes affecting businesses in the digital economy are so far not significant in 
scope and revenue, a certain shift towards introducing new indirect taxes in general is slowly 
continuing  at  global  level.58  Table  6  provides  an  overview  of  already  implemented  or 
concretely planned measures in the EU and third countries.  

Table (6): Overview of unilateral measures taken/planned  

Country 

Planned/ adopted/  Type of tax 

58 PWC (2013) – Shifting the balance from direct to indirect taxes: bringing new challenges. 

53 

 
 
 
 
 
 
                                                 
implemented 

Indirect taxes59 

In the European Union 

Hungary 

Implemented (2014), 
amended (2015, 2017) 

Tax on advertisement 

UK 

Italy 

France 

Planned (2019) 

Planned (2019) 

Withholding tax on revenues derived from intermediation 
and the provision of online advertising 

Tax on digital business-to-business transactions of 
electronically supplied services 

Implemented (2003), 
amended (2016) 

Levy on access to content, including digital content by means 
of a video-on-demand / over-the-top online platform (for the 
cinematography fund) 

Germany 

Implemented (2004), 
amended (2010) 

Levy on access to content, including digital content by means 
of a video-on-demand / over-the-top online platform (for the 
cinematography fund) 

Romania 

Implemented (2005), 
amended (2008) 

Levy on access to content, including digital content by means 
of a video-on-demand / over-the-top online platform (for the 
cinematography fund) 

Croatia 

Implemented (2007) 

Portugal 

Implemented (2007) 

Levy on access to content, including digital content by means 
of a video-on-demand online platform (for the 
cinematography fund) 

Levy on access to content, including digital content by means 
of a video-on-demand online platform (for the 
cinematography fund) 

Belgium (certain 
regions) 

Implemented (2009) 

Levy on access to content, including digital content by means 
of a video-on-demand online platform (for the 
cinematography fund) 

Czech Republic 

Implemented (2012) 

Levy on access to content, including digital content by means 
of a video-on-demand online platform (for the 
cinematography fund) 

In third countries 

United States 
(certain states) 

Implemented (2015-
2016) 

India 

Implemented (2016) 

Levy on access to digital content and streaming services 

Levy on the provision of online advertisement services by 
non-residents 

Canada (certain 
states) 

Planned (2018) 

Levy on access to digital content and streaming services 

59 VAT on digital services is not included here. 

54 

 
                                                 
Brazil (certain 
states) 

Planned (2018) 

Levy on access to digital content and streaming services 

Direct tax initiatives (anti-abuse and new approaches to define a significant economic presence for tax 
purposes) 

In the European Union 

UK 

Italy 

Implemented (2015) 

Diverted profits tax 

Adopted (2017), in force 
(2018) 

Administrative procedure for large non-resident 
multinational enterprises 

Slovakia 

Adopted (2017), in force 
(2018) 

Tax on income derived from intermediation through websites 
and online platforms 

In third countries 

Israel 

Implemented (2016) 

The significant economic presence test for non-resident 
enterprises 

Australia 

Implemented (2017) 

Diverted profits tax and additional anti-avoidance rule for 
large non-resident multinational enterprises 

India 

Planned (2018) 

New concept of significant economic presence 

United States  

Adopted (2017), in force 
(2018) 

The introduction of the concept of a 'base erosion anti-abuse 
tax' (BEAT) for large multinational enterprises 

Source: European Commission analysis based on various sources, such as national legislations, replies to the 
Member State consultation or other government sources, websites of national film funds, European Film Agency 
Directors (EFADS) website, website of  the International Bureau of Fiscal Documentation (IBFD  - for most of 
the direct tax initiatives) and Thomson Reuters Tax & Accounting for the US BEAT measure.  

1.19 What are the available interim policy options? 

Focus on taxes on revenue from digital services 

The  international  debate  on  solutions  for  taxing  digitalised  businesses  focusses 
predominantly  on  revenue  taxes.  Table  6  shows  that  almost  all  unilateral  taxes  that  have 
already been introduced or are being planned are revenue taxes. The OECD in its work has 
also  focussed  on  taxes  levied  on  revenue  whenever  considering  interim  solutions  to  the 
taxation of the digital economy (OECD, 2015a). Table (6) shows that almost all existing and 
concretely planned taxes are revenue taxes.  

Indeed, other conceivable interim, interim solutions are either difficult to reconcile with 
the  current  (international)  tax  framework  or  their  implementation  would  be  too 
complex for an interim  solution. To be implementable within a reasonable time  span,  any 
feasible  solution  first  needs  to  respect  the  boundaries  set  by  the  national  and  international 
legal  framework,  notably  the  EU  treaties,  the  rules  implied  by  membership  of  the  World 
Trade Organisation, and other international commitments, for example through the Inclusive 
Framework  or  the  OECD  multilateral  instrument,  double  tax  treaties,  and  the  EU  rules  for 
VAT. Secondly, any feasible interim solution needs to be implementable in practice within a 

55 

 
 
reasonably  short  period  of  time,  which  excludes  options  that  pose  considerable  practical 
implementation challenges.  

Raising VAT rates on digital services is not feasible within the EU VAT framework. In 
particular:  (i)  higher  VAT  rates  for  certain  digital  services  would  run  counter  the  current 
principle  in  the  VAT  Directive60  that  all  goods  or  services  could  only  be  taxed  up  to  the 
standard rate; (ii) Member States are currently allowed to set up one  standard rate only, and 
deviating from this principle would cause major disruptions that the current objectives do not 
justify;  and  (iii)  raising  VAT  on  services  supplied  digitally,  and  not  on  the  same  services 
which could also be supplied non-digitally, could raise concerns from the perspective of the 
principle of fiscal neutrality61. Further, it must be borne in mind that a higher VAT rate would 
have a very limited impact on business-to-business transactions, due to the deduction of  input 
VAT to which the vast majority of businesses are entitled. Finally, raising VAT rates would 
seem  to  run  counter  to  the  proposal  on  VAT  rates  of  18.1.201862  which  is  intended  to  give 
more freedom to Member States to set VAT rates. 

A  transaction  tax  on  those  digital  services  that  are  remunerated  by  users  through  the 
provision of data is also discarded, as its implementation would be too difficult. The tax 
would be levied early-on in the value creation process on the provision of a digital service (for 
example, performing a web search) remunerated by users through the provision of data. In the 
absence of a monetary compensation for the digital service, the tax would have to be levied on 
a deemed turnover or profit on the barter transaction: provision of data for access to a digital 
service.63  Therefore  a  deemed  monetary  value  would  have  to  be  attributed  to  data 
transactions, which is not realistic to implement within a short period of time. Moreover, as 
the  Commission  Expert  Group  on  the  taxation  of  digital  economy  (2014)  points  out  – 
gathering  of  data  'per  se',  should  not  constitute  a  taxable  event  –  it  may  constitute  internal 
know-how  of  the  company  and  never  be  transferred.  If  on  the  other  hand,  the  data  is 
transferred and monetised at a later stage, it would be taxed twice. 

Although  a  tax  on  profits  may  be  theoretically  more  efficient,  it  does  not  present  a 
realistic  option  for  an  interim  solution,  largely  due  to  its  interference  with  double  tax 
conventions. A new tax on profits within the existing international corporate tax framework 
would face exactly the same limitations that are at the root of the problem. In a model with 
perfect tax enforcement the optimal tax base is pure profits (preserving production efficiency), 
whereas, even at a low rate, revenue taxes can be inefficient as they apply multiple times over 
the  supply  chain  and  distort  input  prices  ('cascading  effect').  However,  if  profit  taxes  are 
difficult to enforce, accepting some degree of cascading could improve outcomes, as the loss 
of  production  efficiency  could  be  more  than  compensated  for  by  the  increase  in  revenue 
collection as the broader turnover base is harder to circumvent. In addition, levying a specific 

60 Council Directive 2006/112/EC of 28 November 2006 (OJ L 347, 11.12.2006, p. 1). 
61 See, among others, CJEU judgment of 3 May 2001, Commission v France, C-481/98, EU:C:2001:237, 
paragraphs 21 and 22. 
62 COM(2018) 20 final 
63  Such  a  tax  could  be  potentially  interesting  as  it  could  address  some  negative  externalities  arising  from  the 
exploitation of personal data (Bloch and Demange 2018) 

56 

 
                                                 
tax  on  profits  derived  from  digital  services  is  complex.  It  requires  determining  the 
corresponding costs incurred in relation to the digital service as companies in most cases earn 
also other revenues (not falling under the scope of the new tax). 

In  its  conclusions  from  5  December  2017,  the  ECOFIN  Council  has  invited  the 
Commission  to  also  assess  temporary  measures,  mentioning  explicitly  a  levy  based  on 
revenues from digital activities in the EU that would remain outside the scope of double 
tax conventions.64 Given this increased focus on revenue taxation, the options examined here 
also revolve around variants of such a tax. The various options examined mainly vary in terms 
of  their  scope  (type  of  company  and  type  of  services  covered),  their  threshold  and  their 
applicable rate. 

Possible design options of a revenue tax on digital services 

To  comply  with  the  existing  legal  framework,  the  tax  would  need  to  apply  to  resident 
and non-resident companies alike, as well as to domestic and cross-border transactions. 
The  equal  treatment  of  residents  and  non-residents  is  needed  to  comply  with  the  free 
movement of services case law of the Court of Justice which found that it is discriminatory to 
a  apply  a  specific  tax  to  non-residents,  if  the  comparable  activity  or  income  of  resident 
taxpayers is not taxed by an analogous tax (with a similar rate and based on a similar tax base 
– see Joined Cases C-344/13 and C-367/13 Blanco and Fabretti). In addition, the fundamental 
freedoms, namely Articles 49 and 56 TFEU as interpreted by the European Court of Justice, 
require that cross-border activities are subject to the same tax treatment than domestic ones. 
See also Schön (2017) for a similar analysis and conclusion. 

Moreover,  alleviating  double  taxation  by  crediting  corporate  tax  already  paid  against 
the new tax or vice versa is not a feasible option.  Crediting would involve deducting one 
tax against the tax liability of another tax, thereby potentially fully compensating for the tax 
paid. First, crediting the new tax (an indirect tax) against corporate income tax (a direct tax) 
or  vice  versa  would  compromise  the  legal  nature  of  the  tax  and  impact  double  tax 
conventions.  Second,  the  possibility  to  credit  corporate  income  tax  (or  against  corporate 
income tax) would in practice only be feasible if a company is established or has an existing 
permanent establishment in a Member State. If as result only those businesses not established 
in  a  Member  State,  or  without  a  permanent  establishment  in  that  Member  State,  would  be 
taxed for their digital services in that Member State, the new tax could be seen as a de facto 
restriction  on  the  freedom  to  provide  services  within  the  EU.  In  addition  to  these  legal 
considerations,  crediting  corporate  income  tax  would  also  be  difficult  from  a  practical 
perspective.  It  would  require  determining  the  share  of  corporate  tax  paid  that  relates  to  the 
taxable  revenues  from  the  digital  service.  A feasible option is  to  allow the deduction of  the 
revenue tax against the corporate tax base, an option examined in section 9.3. 

64 The Council "INVITES the Commission in responding to the challenges of taxation of profits of the digital 
economy to take into account paragraphs 13 to 20 of the present conclusions, and however, TAKING NOTE of 
the interest of many Member States for temporary measures, such as for example an equalisation levy based on 
revenues  from  digital  activities  in  the  EU  that  would  remain  outside  the  scope  of  double  tax  conventions 
concluded by Member States, CONSIDERS that these measures could also be assessed by the Commission;" 

57 

 
                                                 
All  other  design  options  are  less  clear-cut  and  each  'design  dimension'  comes  with  at 
least  two  main  options  to  choose  from.  To  keep  the  exposition  in  this  impact  assessment 
tractable,  the  assessment  within  one  option  dimension  is  treated  largely  independent  from 
choices in the other dimensions, unless there is a direct cross-impact. For example, to assess 
different  options  for  the  tax  rate,  the  expected  revenue  collected  from  the  tax  plays  a  role, 
which in turn depends on other choices such as the scope of the tax and the threshold applied.  

1.19.1  Options for the material scope (which services are covered)   

Three main options for the material scope of the tax are being examined, which differ in 
the degree to which they capture user contribution to the creation of the digital service. 

Broad scope – A first option would be to apply the tax to digital services from all business 
models  as  described  in  section  2.1.4,  irrespective  of  the  degree  of  user  contribution.  This 
would  include  services  provided  by  marketplaces/intermediary  platforms,  by  businesses 
employing the social media and advertising model and by digital platforms granting access to 
content/solutions. 

Narrow scope – Another option would be to apply the tax narrowly to those business models 
where the user contribution plays a central role in the sense that the service would not exist if 
the  user  did  not  contribute  to  it  (e.g.  the  advertising  model  and  marketplaces/intermediary 
platforms). 

Mixed scope - A third variant would be to levy the tax on a broader scope than the narrow one 
by adding other services where user contribution is significant but maybe not essential (e.g.  
including also some of digital content/solution services). This would require an analysis of the 
nature and degree of user contributions for various activities. 

1.19.2  Options for the application of a revenue threshold   

One option is to have no threshold and apply the tax to all companies with relevant services.  

Alternatively,  the  tax  could  be  applied  only  to  companies  that  exceed  certain  revenue 
thresholds.  

Moreover, thresholds could be defined on a worldwide basis, at EU, or at Member State level 
and  could  either  be  defined  in  terms  of  overall  revenues  of  a  company  (irrespective  of  the 
service generating the revenue) or in terms of revenues from the provision of digital services.  

1.19.3  Options for the tax rate 

Given that it would be applied on turnover and not on profit, a low rate is warranted. Hence, 
options for a tax rate varying between 1% and 5% of the revenues from the relevant services 
will be examined. 

1.19.4  Options for the allocation of the tax 

Where  the  users  involved  in  digital  services  are  located  in  different  Member  States,  the 
revenues resulting from the supply of the services could either be allocated to each Member 

58 

 
 
 
 
State  where  the  users  are  located,  irrespective  of  whether  such  users  have  paid  for  the 
service they received, or solely to the Member States from where a payment has been made.  

If tax base is allocated according to where users are located, the revenues resulting from the 
supply of services consisting in the placing of targeted online advertising to users would be 
taxed in the Member State where the users are located (i.e. the Member States of the viewer). 
And the revenues resulting from the supply of services consisting in the making available of 
online  platforms  where  users  can  interact  would  be  taxed  in  the  Member  State  where  such 
users are located. 

1.19.5   Options to relieve double taxation 

The  new  tax  could  or  could  not  be  deducted  against  corporate  income  tax  paid  to  alleviate 
potential cases of double taxation. 

1.19.6  Options for the collection of the tax 

The payment of the tax can be made by the company conducting the digital service (based on 
aggregate gross revenues from the relevant services) using a self-declaration system. For non-
resident  companies,  this  could  be  administered  via  a  One-Stop  Shop.  Alternatively,  the  tax 
could be levied as withholding tax paid by the customers or intermediaries involved (based on 
individual digital transactions).  

Table (7) Summary table of the description of main option dimensions for the interim 
solution 

1. Services 
covered 

2. Revenue 
threshold(s) 

3. 
Rate 

No threshold 

1% 

4. 
Allocation 
of tax 
Based on the 
distribution of 
users. 

5. Double 
tax relief  

6. Collection of the 
tax 

No deduction 
from the 
corporate 
income tax 
base. 

Tax withheld by customers 
or intermediaries, based on 
individual digital 
transaction  

3% 

Application of a 
general revenue 
threshold Y/N 
and level 

Based on the 
distribution of 
revenue. 

Deduction 
from the 
corporate 
income tax 
base. 

Tax paid by companies on 
aggregate gross revenues 
from the relevant services, 
using a self-declaration 
system. For non-resident 
companies, possible 
administration 
administered via a one-stop 
shop 

Broad application, 
revenues from 
social 
media/advertising 
model, 
intermediary 
platforms and 
digital 
content/solutions 
Narrow 
application, i.e. 
limited to social 
media/advertising 
model and 
intermediary 
platforms 

5% 

Mixed application 
which includes 
social 
media/advertising 
model, 
intermediary 

Application of a 
specific  
threshold on 
revenues from 
relevant digital 
services Y/N 

59 

 
 
 
 
and level 

platforms and 
some of digital 
content/solution 
services   
Source: European Commission own analysis 

1.20 What are the impacts of interim policy options? 

Under  this  section,  the  interim  solution  options  will  be  assessed  separately  on  the  various 
dimensions for which a decision needs to be taken. 

1.20.1  No action on an interim solution 

It is fair to expect that the service-based economy and especially the digital economy will 
continue to develop. The rapid pace, at which this has happened in the recent past, suggests 
that this development will also be relevant in the shorter term, making the challenges related 
to  the  taxation  of  digital  business  models  more  acute.  Based  on  forecasts  by  Statista  on  the 
developments  of  revenues  in  different  digital  markets,  one  can  expect  annual  growth  rates 
between 6% and 17% for digital markets such as online advertisement, digital media or online 
travel.65 Section 5.1 provides a more detailed discussion.  

As  Member  States  and  the  public  wish  to  see  that  all  type  of  companies  contribute 
equally to public budgets, the pressure to act at national level will increase. Not offering 
any interim solution is therefore likely to result in more unilateral national measures targeting 
by and large the digital economy. So far only a few specific tax measures are in place or are 
concretely  planned  in  certain  Member  States  (see  Table  6  in  section  9.1),  but  the  trend  has 
been increasing (Figure (4)). Moreover, these measures are rather different in terms of their 
scope  and  rationale.  The  European  Council  observed  in  its  conclusions  of  5  December  that 
"the speed at which the economy is digitalising and the absence of international consensus on 
the modernisation of the rules of distribution of taxing rights gives rise to unilateral actions, 
leading  to  an  increase  of  double  taxation  disputes  between  Member  States  and  thereby 
undermining  the  Internal  Market".  This  is  also  a  risk  that  respondents  to  the  open  public 
consultations see. More than 80% of the 462 respondents agree (or even strongly agree) that 
the  "current  situation  could  push  some  Member  States  toward  adopting  uncoordinated 
measures that would lead to the fragmentation of the Single market". Only 6% disagree with 
this statement.  

With an increasing number of unilateral measures, competitive distortions, compliance 
burden and double taxation disputes increase, while it gets more difficult to harmonise 
the  variety  of  taxes  or  agree  on  comprehensive  solutions  in  the  future.  As  a  significant 
number  of  digital  companies  are  active  in  more  than  one  jurisdiction,  distortions  of 
competition and of the single market can occur. These relate to potential instances of double 
taxation (if two Member States levy, for example, an indirect tax on the same specific digital 

65 Statista Digital Economy Outlook 2017. 

60 

 
 
 
                                                 
services) or double non-taxation (if neither of two Member States taxes such specific digital 
services).  Double  taxation  could  occur,  for  example,  if  both  countries  tax  online 
advertisement services, but use different principles (country A levies the tax if the company 
placing interim online advertising to users is resident there and country B levies the tax if the 
companies advertising their products in country A are resident in country B). These situations 
are  likely  to  increase  double  taxation  disputes  between  Member  States.  They  would 
furthermore  most  likely  remain  unresolved  because  existing  international  dispute  resolution 
rules do not cover these cases. 

Figure (4): Development of number of new measures targeting businesses in the digital 
economy in the EU28 

25

20

15

10

5

0

Third countries - 
cumulative 

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

EU - cumulative 

Numbers of unilateral measures taken / planned in...  

… the EU 

… third countries 

Source: European Commission services analysis (see Table (6)) 

1.20.2  Material scope (which activities are covered) 

Which activities could be subject to a new tax on revenues derived from digital activities 
is a central question. Activities involving the supply of physical goods are excluded from the 
scope of the comprehensive solution and as the interim solutions serves as a proxy measure, 
the  same  applies  here  as  well  (see  section  6.1).  Again,  this  does  not  mean  that  platforms 
charging fees for facilitating the trade of physical goods are excluded. These platforms charge 
fees for a digital service.  

A key principle  to  respect when  addressing challenges  in taxing the  digital economy is 
the  taxation  of  profits  where  the  value  is  created.  Although  to  different  degrees,  this 
rationale  holds  for  both  a  comprehensive  solution  and  an  interim  solution.  Section  2.1 
evidenced the complex nature of value creation in the digital economy. The value creation is 
the  result  of  a  combination  of  several  factors  that  are  mainly  technology  (such  as  an 
algorithm), knowledge and user contribution.  

61 

 
 
 
 
 
The  interim  solution  is  meant  to  be  a  good  and  simple  interim  proxy  to  deal  with  the 
most extreme cases of mismatches between the location of taxation and value creation. 
Since the tax would be based on gross revenues and needs to be simple, it cannot be tailored 
towards  different  degrees  and  types  of  user  contribution.  Allocating  the  revenue  tax  base 
across jurisdictions needs to be based on simple rules, which implies that other components of 
value creation are difficult to take into account.  

The  interim  solution  would  thus  fully  weigh  on  one  factor  of  value  creation  –  the  one 
currently disregarded in profit allocation rules, which is related to user contribution. As 
a  result,  central  to  the  definition  of  the  scope,  is  the  role  of  users  in  the  value  creation  for 
digital business models. In other words, all digital services should be covered for which the 
users play a central role in the value creation.  A test to  determine  whether a certain service 
falls  within  the  scope  could  be  that  in  absence  of  user  generated  content  and  of  user 
participation,  the  digital  service  would  not  exist  in  its  current  form.  Table  8  summarises  a 
qualitative  assessment  of  the  relevance  of  user-based  features  for  the    business  models 
identified in section 2.1, except for telecoms and software and for online retailers as far as the 
supply of physical goods is concerned.  

Table (8): Qualitative assessment of users' role in the value creation in digital business 
models 

Business Model 

Revenue 
model 

USER-BASED FEATURES 

Network 
effects 

Big Data Relevance 

1  Marketplace / Intermediaries 

 

Subscription or 
transaction-based 
fees paid to 
platforms  

Reliance:  
Source: user behaviour on 
platform, reviews (both sides). 
Use: matching, reputation/trust 
building 

2  Advertising model 

3  Digital content/solutions: 

i) media/content 

ii) gaming 

iii) electronic payment 

iv)  cloud computing services 

v)  other digital solutions / 
software 

Sales of 
advertisement 
space;   
Sales/transmissio
n of data 
Pay-per-use, 
subscription or 
transaction-based 
fees.  

 
(including from 
users to 
advertisers) 

Reliance:  
Source: user behaviour on 
platform, websites 
Use: targeted advertising 

 

Reliance:   
This category covers many 
services with a wide range of use 
of consumer data in the value 
creation 
Source: from customers' 
behaviour to generation of 
content 
Use: improve quality of service, 
pricing or sales policy, 
development of new products 

Source: European Commission services  
Legend: Moderate; Strong; Very Strong 

62 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note: Network effects occur when the size of the overall network increases users' satisfaction. It encompasses 
both direct and indirect effects.  
The distant sales model/e-commerce is not in the scope of the interim solution.  

All the above business models rely on users to create value, although to a varying extent. 
User  data  can  be  used  to  support  the  distribution  side  of  the  business  by  defining  sales-, 
marketing-  and  pricing  policies.  An  example  would  be  online  retailers  or  digital  media 
providers  analysing  consumer  preferences  to  display  their  products  in  a  more  targeted  way. 
But user data can also be used to improve consumer experience, develop new products or sell 
user information  to  third parties. The participation  of users can  be passive (for example, by 
providing  information  by  clicking  on  links  or  doing  online  search)  or  more  active  (for 
example,  ensuring  the  quality  control  through  rating  or  reviews,  by  sharing  a  playlist  or 
creating  online  content  by  sharing  knowledge,  codes  or  videos,  by  entering/sharing  their 
information  and  preferences,  which  allows  matchings    them  with  specific  other  users,  on  a 
platform). Where the market value of a business increases with the size of the user network 
(through 'network effects'), users have an additional role in the value creation, either passively 
merely by joining the user base, or more actively, for example by inviting new users.   

Business  models  which  generate  revenues  from  selling  advertisement  space  or  selling 
user  data  as  well  as  intermediary  platforms  heavily  rely  on  user  participation  to  their 
network.  Indeed,  such  business  models  would  not  exist  without  user  contributions.  In  the 
case  of  online  advertising,  for  example  by  social  media  and  search  engines,  the  revenue  is 
entirely based on the exploitation of detailed granular knowledge about user preferences and 
characteristics (including location), either through the offering of in most cases very effective 
targeted advertisements  or  through the outright sale of this information  to  third parties. The 
relevant  knowledge  is  generated  through  the  analysis  of  the  user  online  actions  (e.g.  web 
browsing, content creation), collected and analysed with big data methodologies.  

Strong network effects help to build-up a very large user base, which is a pre-condition 
for both big data analysis and for general company profitability given the low profit per-
user and the very high fixed costs. In some cases, users contribute also to the creation of the 
service  in  exchange  of  advertising  (e.g.  online  content  for  social  media).  In  the  case  of 
marketplaces, building trust between the buyers and the sellers is essential for the existence of 
the  market  itself.  The  build-up  of  trust  is  usually  attained  through  a  mechanism  of  user 
reviews,  which  is  a  form  of  user  creation  of  content.  In  the  absence  of  a  trust  mechanism, 
transaction costs would be too high for purchases to happen. A significant scale, required for 
big data analysis, is also very relevant for obtaining a better match between sellers and buyers, 
thereby improving the service, which in turn helps attracting new users. 

The  nature  and  degree  of  user  contributions  vary  considerably  across  and  within 
different digital content/solution services. The latter can be further broken down as follows: 

  digital media/content 
  gaming 
  electronic payments 
  cloud computing 

63 

 
  other solutions    

For  most  of  these  sub-categories,  user-generated  content  and  user  participation  is  not 
central  to  value  creation,  although  there  are  significant  variations  from  one  service  to 
another  and  across  companies.  Gaming  is  a  clear  example.  Users  can  play  against  a 
computer.  But  they  can  also  play  against  each  other  (hence  the  importance  of  the  network) 
and  even  create  new  features  of  the  game.  Similarly,  looking  at  cloud  computing  services, 
which  generally  rely  only  to  a limited  extent  on user  participation,  there are cases  in  which 
companies  rely  on  users  to  extend  their  scale  (e.g.  by  offering  extra  free  space  to  a  user  in 
exchange  of  inviting  potential  new  user  to  join  the  network  or  to  share  some  content).  E-
payment  may  involve  intermediary  platforms  but  in  such  cases,  the  digital  service  offers  a 
solution that allows two or several users that are already in contact to finalise a transaction. In 
such case, the e-payment platform does not require user data to enable them to find each other 
and meet on the platform.   

Pinning down the level of user contribution for each sub-category and company would 
require  a  case-by-case  assessment  based  on  a  solid  methodology,  which  would  add 
complexity to the new tax. However, the more complex the composition of services subject 
to  the  new  tax  is,  the  higher  is  the  risk  that  companies  plan  around  it  by  putting  in  place 
arrangements to avoid paying the tax. Capturing a large variety of different services in legal 
text is difficult. It may even require a detailed definition of criteria and/or a nomenclature to 
assess whether a company falls under the scope. This in turn implies increased administration 
and compliance costs, including elevated risks for disputes. Such complexity would be likely 
with  the  mixed  scope,  but  to  some  extent  also  for  the  broad  scope,  for  which  exemptions 
would  likely  be  necessary  (for  example  excluding  the  sale  of  software).  Moreover,  in  the 
absence  of  solid  methodology,  the  tax  risks  also  capturing  services  for  which  the  user 
contribution  is  rather  limited.  Hence  it  would  not  be  a  good  proxy  for  the  comprehensive 
solution and therefore not a coherent measure. 

The narrow scope has the lowest risk of taxing too heavily services that play a key role 
for the development of the digital single market. For example, a number of digital solutions 
and  cloud  services,  but  also  Information  and  Communication  Technology  services  are 
important  in  the  business-to-business  segment  that  helps  both  younger,  more  innovative 
companies  to  develop,  but  also  more  traditional  companies  to  benefit  from  digitalisation  of 
their processes. It would also avoid the double taxation of digital content that could already be 
subject to a specific levy (e.g. audio-visual media services as envisaged in the review of the 
Audio-visual  Media  Services  Directive,  which  are  already  subject  to  a  tax  in  a  number  of 
Member States). 

In terms of potential revenue impact there is little reason to include or exclude certain 
services.  Sections  9.3.3.  -  9.3.5  discuss  the  revenue  potential  of  the  measure  for  different 
assumptions on the scope. Overall, the tax revenue potential is limited in the short term, the 
key  advantage  of  the  interim  measure  rather  lying  in  the  prevention  of  a  mushrooming  of 
unilateral measures. 

64 

 
To improve fair taxation, it is important that the interim solution has a clear and strong 
rationale  for  attributing  tax  base  across  jurisdictions.  If  the  tax  is  allocated  based  on  a 
fairly  simple  allocation  key  that  captures  mainly  user  contributions,  the  best  and  fairest 
outcome  can  be  expected  with  the  narrow  scope  or  a  very  well  targeted  (and  functioning) 
mixed  scope.  Attributing  revenues  based  on  user  contributions  which  rely  heavily  on  other 
types of input would not result in a fair allocation of the tax and could overall hurt the fairness 
of the system.  

Both  the  narrow  scope  as  well  as  a  (selective)  mixed  scope  would  improve  the  level-
playing  field  compared  to  the  baseline  scenario.  The  key  improvement  would  happen  by 
preventing further fragmentations of the single market. Irrespective of the option chosen for 
the  material  scope,  it  can  be  expected  that  a  new  harmonised  tax  on  revenues  from  digital 
services would largely stop the trend towards additional unilateral measures. However, a too 
broad scope could at the same time risk putting an extra burden on services which today's tax 
system already captures more satisfactorily as user contributions play a more limited role. For 
example,  online  platforms  offering  digital  content  will  often  target  this content  based  on  an 
analysis  of  user  data,  but  they  may  also  use  very  substantial  'traditional'  inputs  to  create 
content  (for  example,  producing  a  movie)  or  tailor  their  services  requiring  local  staff  (for 
example, digital business-to-business solutions).  

Table (9): Summary of assessment on the material scope 

Broad scope – all 
services 

Mixed scope  

Narrow scope 

Improving fairness  

Improving the level-playing 
field 

- 

+ 

+ 

++ 

++ 

++ 

- 

+ 

++ 

Economic impacts (revenue 
potential, impact on 
digitalisation, distortions 
caused)  
Administrative and 
compliance burden (including 
ease of implementation) 
Coherence (notably with 
comprehensive solution) 
Source: European Commission own analysis 
Notes:  The  assessment  is  done  against  the  baseline  scenario.  The  number  of  'plusses'  signify  the  degree  of 
improvement  compared  to  the  baseline  scenario.  The  number  of  'minuses'  signify  the  degree  of  worsening 
compared to the baseline scenario.   

+++ 

++ 

+ 

+ 

- 

- 

Summing  up,  a  (selective)  mixed  or  narrow  scope  would  be  the  most  effective  scope 
options to improve fairness and the level playing field in the interim period. At the same 
time,  the  narrow  scope  is  also  expected  to  have  the  best  economic  impact,  notably  as  it 
minimises additional distortions, while still having broadly the same revenue potential as the 
mixed scope. Due to its simpler nature and clear link with user contributions, a narrow scope 

65 

 
 
 
is  also  the  option  that  is  expected  to  have  the  best  impact  on  the  compliance  and 
administrative burden while being coherent with the comprehensive solution. 

A  tax  on  revenues  from  certain  digital  services  (for  example,  from  the  sales  of  online 
advertising)  received  a  larger  support  from  respondents  to  the  public  consultation  and 
Member  States  consultation  than  a  tax  on  revenues  generated  from  all  digital  services 
although the difference is not large (see summary in Annex 2).66 

1.20.3  Application of a revenue threshold 

Revenue threshold Yes/No 

There  are  good  reasons  to  apply  some  form  of  revenue  threshold.  The  first  important 
reason  is  that  larger  companies  are  more  easily  able  to  engage  in  aggressive  tax  planning, 
which  was  also  one  rationale  for  the  CCCTB  threshold  and  the  threshold  for  country-by-
country  reporting  (of  EUR  750  million).67  A  second  very  important  reason  is  that  a  certain 
scale is necessary for companies to benefit from user contributions and network effects. This 
is also why younger and smaller companies with innovative business models often go through 
a  phase  of  building  their  user  base,  and  would  be  less  able  to  compete  with  the  large 
marketplayers,  who  are  relatively  less  impacted  by  the  tax.  These  companies  are  also  more 
often loss-making and could be particularly hit by a tax on gross revenue. In particular for the 
two  business  models  covered  in  the  preferred  material  scope  of  the  tax,  advertising  and 
marketplaces/intermediaries,  there  are  strong  winner-takes-most  dynamics.  Benefitting  from 
strong (direct and indirect) network effects, large market players have had a tendency to buy 
smaller  competitors.  Ultimately,  this  can  hurt  innovation  and  make  for  less  dynamic 
developments.68  Third,  the  turnover  threshold  would  serve  to  ensure  an  acceptable  cost-
benefit  ratio  for  the  sake  of  proportionality  of  the  measure.  It  would  capture  the  most 
problematic situations in the interim period,  keeping the measure simple with an acceptable 
cost-benefit ratio. 

Revenue threshold on all revenue or only revenue from relevant digital services  

A  global  turnover  threshold  on  all  revenue  would  make  it  easier  for  companies  to 
determine  whether  they  need  to  pay  the  tax.  Since  companies  may  not  already  record 
separately  revenues  from  the  services  falling  under  the  material  scope  of  the  new  tax,  and 
certainly smaller companies might not generally do so, a threshold on general turnover would 
greatly limit the extra burden imposed on companies and provide important legal certainty. 

66  54%  of  the  respondents  to  the  public  consultation  and  10  Member  States  that  responded  to  the  targeted 
consultation believe that a tax on the revenues from certain digital services would solve the current problems to a 
great extent or somehow as compared to 46% of respondents and 8 Member States for the tax on revenues from 
digital services in a broader scope.  
67 See section 5.2 of SWD(2016) 341 final. 
68  See  discussions  on  this  point  in  UNCTAD  (2017c,  pages  12  and  81)  and  evidence  on  the  rise  of  'superstar 
firms', including in the digital sector, in Autor et al. (2017). The latter paper shows, by exploiting US firm level 
data,  that  if  globalisation  or  technological  changes  advantage  the  most  productive  firms,  industries  become 
increasingly dominated by superstar firms with high profits and a low share of labour. 

66 

 
                                                 
At the same time, it seems unreasonable to impose a tax on a company above the general 
threshold, which has only minor relevant digital services in the EU. For example, a large 
retailer might earn advertising revenues by placing online ads on its website for goods that are 
complements to its own goods but sold by a non-associated company. But if so, it may still 
not  be  worth  including  the  revenues  as  long  as  they  are  relatively  minor  given  the  extra 
burden on companies and tax administrations this entails. 

As a result, there are good reasons to operate both types of thresholds, each with their 
own rationale. The global turnover threshold would serve as a first, easily applicable filter to 
safely exclude, and provide legal certainty, for companies below the threshold.  The specific 
threshold  on  turnover  from  relevant  digital  services  would  serve  to  exclude  cases  that  are 
relatively  small  and  where  the  benefit  of  taxing  them,  might  not  be  justify  the  extra  effort 
required  by  tax  administrations  or  the  companies.  In  addition,  it  would  serve  to  exclude 
companies in  more traditional sectors that have started to become more digitalised and may 
have relevant digital services revenues that still play a relatively minor part in their business 
operations.  

1.20.4  Level of the thresholds 

a. General turnover threshold 

There are a number of relevant considerations for determining the level of the general 
turnover threshold. First, one should consider the additional burden imposed on companies. 
Second, the impact on tax revenue is a relevant. Third, the threshold should be such that the 
aim of preserving the single market in the interim period and improving the level playing field 
is well served. This should take into account that only companies of a certain scale provide 
digital services for which user contributions play a central role. Lastly, in setting the threshold 
one should be mindful of not hurting the development of the digital single market in the EU. 
Except for the second item, all of these considerations point to a rather high threshold, though 
it gives little guidance for the precise level. 

A  high  threshold  would  allow  concentrating  more  on  firms  with  dominant  market 
positions  (see  section  2.1.3  (d)  on  winner-takes-most  dynamics).  Most  of  digital  platforms 
tend  to  privilege  fast  growth  and  reinvest  available  funds,  including  those  from  separate 
business  segments,  to  build  a  sizeable  users  base  which,  in  the  long  term,  will  make  the 
company profitable. Indeed, to survive, such business models need to build a large user base 
in the first phase of their life. Adopting a high threshold would allow preserving investment 
and growth dynamics in digital markets. In addition, a global turnover threshold of EUR 750 
million  would  also  be  coherent  with  other  proposals  such  as  the  CCCTB  or  the  public 
country-by country reporting. The last feature is expected to contribute to a higher degree of 
compliance since companies beyond this threshold have detailed reporting obligations also on 
services in third countries. 

Reliable  data  showing  the  full  distribution  of  annual  turnover  by  digital  economy 
companies is not available, but some inference can be taken from general firm-level data 
(not specific to the digital economy). Table (10) shows that for the general economy in the EU 

67 

 
some two-thirds of turnover is captured by applying a revenue threshold of EUR 750 million. 
The data suggests that reducing the threshold to EUR 500 million could more than double the 
number  of  companies  affected,  with  only  about  7%  increase  in  revenues.  Reducing  the 
turnover  threshold  to  EUR  50  million  could  more  than  triple  the  number  of  companies 
affected, while increasing revenues by about 25%. Data provided in the last column of Table 
12  also  shows  that  the  variation  in  the  share  of  entities  with  EU  or  third  country  global 
ultimate  owner  is  reasonably  small.  On  the  other  hand,  when  moving  from  the  500  million 
threshold  to  50  million,  the  share  of  purely  domestic  groups  (with  subsidiaries  in  only  one 
Member State) increases considerably, more than doubling from 24.5% to 51%.  

Table (10): Trade-off between potential revenue and number of companies 

Consolidated 
turnover  

Share of 
entities in the 
EU 

Corresponding 
share of 
turnover 

Share of groups 
active only 
domestically 
compared to 
total number of 
groups in this 
bracket69 

Share of entities 
with global 
ultimate owner 
located in the 
EU-28 

<= 
EUR 50 million 

> EUR 50 million 

> EUR 500 million 

> EUR 750 million 

92.8% 

7.2% 

4.8% 

2.0% 

19.9% 

81.1% 

68.6% 

64.2% 

95.2% 

88.0% 

51.0% 

24.5% 

19.2% 

79.6% 

78.4% 

74.2% 

Source:   Adaptation of table 8 in the Impact Assessment accompanying the proposal for  a Council Directive on Common 
Corporate Tax Base and a Common Consolidated Corporate Tax Base (SWD (2016)341) based on Bureau van Dijk Orbis 
data. In the CCCTB impact assessment, the share of groups was reported in column 1. Here we report the share of entities, 
which is more relevant for the purpose of this impact assessment. 

b. Specific turnover threshold   

A  complementary  specific  threshold  set  at  EU  level  on  the  annual  revenues  from  the 
provision  of  taxable  digital  services  could  further  limit  the  application  to  the  most 
significant  cases.  The  main  argument  for  such  a  complementary  threshold  is  that  it  would 
limit the application of the tax to cases where there is a significant level of revenues derived 
from a digital service ('the digital footprint') carried out in the EU.  

In  addition,  the  specific  threshold  could  serve  to  target  more  effectively  the  most 
relevant cases. As explained in section 2.2.1, there is only a difficulty to tax profits or issues 
of corporate tax avoidance if a company is active in several jurisdictions (in the sense that its 
users  are  located  in  several  jurisdictions).    Based  on  the  data  presented  in  Table  10,  and  in 
principle for all the general turnover thresholds considered here, there still remains a sizeable 

69    This  ratio  has  been  computed  for  groups  that  have  their  global  ultimate  owner  (GUO)  in  the  EU.  In  other 
words, groups active in the EU but with GUO outside the EU are not reflected in this ratio. This ratio therefore 
gives an upper estimate of the share of purely domestic groups. 

68 

 
 
                                                 
share of purely domestic groups captured by the measure. For large companies (exceeding the 
general  revenue 
threshold)  with  significant  revenues  from  online  advertising  and 
marketplaces/intermediary  services  it  can  reasonably  be  expected  that  they  would  not  be 
purely  domestic.  This  becomes  even  less  likely  if  we  apply  a  sizeable  specific  revenue 
threshold. A minimum bound could be EUR 10 million for the EU as a whole.  

At  the  same  time,  for  the  tax  not  to  be  discriminatory,  the  specific  revenue  threshold 
should not be designed in a way that effectively excludes EU companies. In other words, 
very high revenue thresholds that would restrict the application of the new tax only to foreign 
business would not be allowed from a legal perspective. Based on the data presented in Table 
10,  it  seems  safe  to  conclude  that  for  all  the  general  revenue  thresholds  considered  here,  a 
sizeable share of EU entities would be captured by the measure. However, data on the biggest 
global  companies  with  sizeable  revenues  from  the  relevant  digital  services  suggests  that  a 
specific threshold above EUR 50 million could risk a de-facto discrimination. From the subset 
of  112  companies  examined  in  this impact  assessment,  less  than  a  quarter  would  have  their 
main  business  activity  falling  under  the  scope  of  the  new  tax  and  have  revenues  in  the  EU 
exceeding  EUR  50  million.  Generally,  the  determination  of  the  specific  revenue  threshold 
within the range of EUR 10-50 million should balance the risk of discrimination against the 
risk of damaging digitalisation of the EU economy.  

1.20.5  Tax rate 

The  tax  would  need  to  be  levied  at  a  single  rate.  Compatibility  with  the  freedom  of 
establishment and free movement of services call for the tax to be levied at a single rate to not 
contradict  the  case  law  of  the  Court  of  Justice  of  the  European  Union  (CJEU)  (e.g.  Hervis 
Sport70) that declared steeply progressive tax rates contrary to the freedom of establishment.  

Two angles are particularly important in assessing different tax rate options: 1) the tax 
revenue potential and 2) the level of additional tax imposed on companies.   

Tax revenue potential 

Both a top-down and a bottom-up estimation of expected tax revenue conclude that the 
expected additional revenue collected from the tax would be rather moderate, but with 
significant growth potential over the next years. Table (11) summarises top-down revenue 
estimates  for  different  tax  rates.  Underlying  these  estimates  are  data  (and  forecasts)  from 
Statista on revenue earned from different type of digital services in the EU (Annex 8 provides 
the full details on the methodology). The forecasts for 2019 have been used for the estimates. 
For  a  tax  of  1%  on  digital  advertising  services  and  services  provided  by  online 
marketplaces/intermediaries  applied  to  companies  with  a  global  consolidated  turnover  of 
more than EUR 750 million, the expected gross tax revenue is about EUR 1.6 billion, or about 
0.4% of current corporate income tax revenue. If one assumed deductibility of the revenue tax 
from the local corporate tax base at the EU average corporate tax rate, these estimates would 

70 CJEU, judgment of 5 February 2014, Hervis Sport, C-385/12, ECLI:EU:C:2014:47. 

69 

 
                                                 
reduce to a net figure of EUR 1.2 billion. This corresponds to an increase in total corporate 
income tax revenue of 0.3%. Three times as much is collected if the tax rate is 3% and five 
times as much at a tax rate of 5%. If one factors in annual growth rates between 6% and 17% 
(see section 9.3.1), one could expect these figures to grow by 20-60% over the next 3 years.  

The top-down estimates are overall broadly consistent with the more elaborate bottom-
up  estimates;  the  latter  however  indicate  that  the  top-down  estimate  for  advertising  is 
likely too low. These latter estimates are done on a sample of 112 companies, which almost 
all  have  global  turnover  above  US  $  1  billion  (around  EUR  0.8  billion)  and  have  publicly 
available financial accounts. They are classified in five separate categories (more detail on the 
methodology is provided in Annex 4). A major difference to the top down estimates is that the 
revenue of these companies was allocated to EU Member States based on web traffic statistics 
from  the  web  domains  operated  by  each  company.  This  is  a  major  improvement  of  the 
estimation since it would mirror a tax on revenues allocated across jurisdictions according to 
some  statistic  on  user  contributions.  Overall  this  alternative  methodology  results  in  an 
estimate  of  about  one  third  of  the  top  down  estimate  (table  (12)  below).  Given  that  this 
estimate is done only on a subsample the lower value is not surprising. For advertisement the 
bottom-up  estimate  shows  that  the  top-down  approach  might  underestimate  potential 
revenues.  For  marketplaces/intermediaries,  the  top-down  results  might  be  on  the  high  side, 
considering that  the  estimate  from  the  bottom-up  approach is  8 times  higher.  However,  this 
might be explained by the bottom-up estimates are only based on the largest companies whose 
major  business  activity  is  based  on  advertising  or  being  a  marketplace/intermediary.  It  thus 
ignores the mixed business models that many companies have. 

There  is  a  certain  trade-off  between  thresholds  and  the  revenue  potential,  but  the 
precise  threshold,  as  long  as  it  is  high  enough  to  safely  exclude  start-ups,  is  not  very 
relevant.  Using  turnover  data  from  the  ORBIS  data  base  from  all  companies  (that  is, 
irrespective of the type of business) indicates that reducing the turnover threshold to EUR 500 
million would increase the revenue estimates by about 7%, but more than double the number 
of companies (entities) affected (Table (10) above). A reduction in the turnover threshold to 
EUR  50  million  would  increase  revenue  by  about  25%  and  affect  more  than  three  times  as 
many companies  than under the EUR 750  million threshold. Given the fairly small  revenue 
expected overall, lower thresholds have a very limited added value.  

Table (11): Top down revenue estimates for a tax on gross revenue for the EU-2871 

Tax 
rate 

1% 

   Advertising 

   Marketplace/intermediaries 
   Cloud services* 

in EUR 
billion 
0.3 

1.3 
0.3 

% of CIT 
revenue 
0.1% 

0.3% 
0.1% 

71 Base year for the estimates is 2019. Without the UK all estimates would decrease by about 30%, but this high 
figure might be related to the underlying data being allocated to jurisdictions according to either where the 
company providing the service is located or where the revenue payment originates from. 

70 

 
  
  
  
  
  
  
  
  
                                                 
   Digital media* 

3% 

   Advertising 
   Marketplace/intermediaries 
   Cloud services* 
   Digital media* 

5% 

   Advertising 
   Marketplace/intermediaries 
   Cloud services* 
   Digital media* 

0.1 

0.8 
3.9 
0.9 
0.4 

1.3 
6.5 
1.4 
0.6 

0.03% 

0.2% 
0.9% 
0.2% 
0.1% 

0.3% 
1.6% 
0.4% 
0.2% 

Source: European Commission, own computations based on data from Statista, Bureau van Dijk Orbis database, 
the  Ameco  database  and  Taxation  Trends,  2017  edition.  Notes:  Estimates  are  based  on  a  global  revenue 
threshold of EUR 750 million and on corporate income tax collected in EU-28 in 2015 of 2.5% of GDP.  
Note: Cloud services and digital media are not within the scope. 

Table (12): Bottom-up revenue estimates for a tax  on revenue from digital services (in 
EUR billion). 

Tax rate 
Advertising 
Marketplace/intermediary 
Digital content 

1% 
0.4 
0.2 
1.0 

3% 
1.1 
0.5 
3.1 

5% 
1.8 
0.8 
5.2 

Source:  European  Commission,  own  computations  based  on  data  from  UNCTAD  (2017b),  SimilarWeb  and 
Bureau van Dijk Orbis database.  Notes: Estimates are based on a set of 112 global multinational companies, 
including  the  top  100  digital  MNEs  identified  in  UNCTAD  (2017b)  that  all  earned  revenue  of  more  than  $  1 
billion in 2015. 

Level of additional tax imposed on companies 

Since costs are not taken into account, the corresponding tax on profits implied by the 
tax  on  revenue,  even  at  a  low  rate,  could  be  substantial  for  individual  companies.  For 
example, a  company  that has  EUR 100 of gross revenue  and EUR 85  of (deductible)  costs, 
has  a  mark-up  of  15%.72  If  it  pays  a  tax  on  gross  revenue  of  2%,  it  has  to  pay  EUR  2  in 
revenue tax, which corresponds to a profit tax of 2/15 = 13%. If tax on revenues from digital 
services is deductible from the corporate tax base, the implied profit tax rate reduces to about 
10%.73 

The rate should be decided taking into  account  both the  amount  of  revenue generated 
from  the  tax  and  possible  distortions  from  a  business  perspective.  Since  the  revenue 

72 A mark-up of 15% corresponds to the median we observe for a selection of 21 large companies with relevant 
digital activities.  
73 Based on the average EU statutory corporate income tax rate of 23%. 

71 

 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
 
  
  
  
  
  
  
  
  
  
  
  
  
  
                                                 
tax  on 

revenues 

from  digital  advertising  and 

from  offering 
potential  of  a 
marketplace/intermediary services is in any case rather limited, imposing the tax with a high 
tax  rate  that  might  considerably  hurt  companies  with  lower  profitability  does  not  seem 
justified. Also, considering the fact that crediting of the tax would not be possible and that in 
some  cases  it  may  therefore  lead  to  tax  being  paid  in  addition  to  corporate  tax,  the  tax  rate 
should not exceed 3%. On the other hand going below 1% would not justify (in terms of tax 
revenue gained) the additional burden of introducing a new tax.  

1.20.6  Allocation of the tax 

By allocating the tax according to the revenue earned in a jurisdiction, the tax would in 
many  cases  not  capture  well  the  local  user  contribution.  The  rationale  for  the  interim 
solution is to be a good and simple interim proxy to deal with the most extreme cases where 
users  contribute  a  very  significant  share  of  the  value.  Revenues  from  selling  online 
advertising  space  will  often  not  be  earned  in  the  jurisdiction  where  the  user  is  located.  For 
example,  company  A  located  in  country  X  might  buy  advertising  space  from  company  B 
whose users are  mostly located in  B. In  this case, an allocation of revenue according to  the 
origin of the payment would attribute all revenue to country A, which is not where the users 
are  located.  A  similar,  though  more  complex,  issue  arises  where  the  supply  of  services 
consists in the making available of a multi-sided electronic interface such as a marketplace, 
platform, portal or similar means to users, which allow users to find other users and to interact 
with them. Typically, users of both or all sides of the market are located in different Member 
States.  But often  multi-sided platforms apply reduced or  no fees on the  side of the network 
that is less developed or more elastic, but necessary for the company to run its activity (and 
where  they  want  to  grow  or  maintain  a  large  user  base).  Allocating  revenues  solely  to  the 
Member  States  from  where  a  payment  has  been  made  would  be  rather  straightforward  and 
easily  trackable  both  for  companies  and  tax  administration.  However,  it  would  defeat  the 
purpose of the solution that is to tax where the value contributed by users is created.  

If using the location of the user to allocate tax base, it seems appropriate, where possible, 
to  take  into  account  the  nature  of  the  service  for  the  proxy  used  to  allocate  the  tax. 
Where the users of a digital service are located in different Member States, a possibility is to 
allocate the revenues derived from such a digital service to the Member States where the users 
are located in a proportional way. Rather than using the same allocation key for all services 
(e.g. simply the number of users), it seems more appropriate to take into account the nature of 
each of the digital services within the scope of the tax, so that the final allocation of taxing 
rights better reflects where the revenues have been generated through user contributions.  

For online advertising services, in most of the cases the revenues are linked to the number of 
times  an  advertisement  is  displayed  on  a  users'  device  (other  allocation  keys  could  be  the 
number of times a user accesses a displayed advertisement).  

Where  the  supply  of  services  consists  in  the  making  available  of  an  online  platform,  it 
seems  that  a  distinction  could  be  made  between  cases  involving  an  underlying  supply  of 
services or goods directly between the users of the platform. In such scenarios, it is usually 

72 

 
the  conclusion  of  that  underlying  supply  the  element  which  triggers  the  payment  from  the 
users to the platform in the form of a commission (but they can usually access the platform 
free  of  charge).  Therefore,  it  seems  that  the  number  of  users  having  concluded  such 
underlying transactions could be the allocation key to be taken into account. However, if the 
revenues for the platform simply come from fees that the user have to pay in order to access 
the platform, it seems more suitable to allocate taxing rights to a Member State according to 
the  number  of  users  from  that  Member  State  with  an  account  allowing  them  to  access  that 
online platform.  

1.20.7  Relief of double taxation 

Allowing the deduction of the new tax as a business expense from the corporate tax base 
would alleviate double taxation issues. The new tax is an expense for a company that arises 
in the course of it business. As such it is natural to allow it to be deducted from the corporate 
tax base. To see how this would affect taxation, take a company with relevant digital services 
that  is  tax  resident  in  country  A  and  pays  all  its  corporate  tax  there.  The  user  base  of  the 
company is spread evenly across countries A, B and C. After the new tax is introduced, the 
company pays the new tax on its revenues from digital services in Member States A, B and C. 
By making the tax deductible from the corporate tax base in A, the corporate tax liability in A 
is reduced. 

In the absence of the possibility to credit the new tax against corporate income tax paid on the 
same revenue  (or vice versa,  see section  9.2.4)), allowing the deduction of the tax from the 
corporate tax base would contribute to a fairer outcome overall. 

There is no risk of taxing the same service twice under the new tax. Revenue received for 
a  certain  type  of  service  would  always  be  accounted  for  only  once.  In  the  theoretically 
conceivable  case  that  a  revenue  stream  could  be  associated  to,  for  example,  an  online 
advertising  service  and  an  online  marketplace  service,  one  should  take  precedent  over  the 
other to ensure that the same revenue cannot be taxed twice. 

1.20.8  Collection of the tax 

Withholding the tax on payments 

Withholding  the  tax  when  a  payment  is  issued  may  appear  straightforward  and  the 
calculation  relatively  easy  (Brauner  and  Pistone,  2017),  but  there  are  several 
shortcomings linked to this option. First, when the user of a service is not the payer of the 
transaction,74 the collection is not feasible. As such, withholding the tax would make it very 
difficult to include business models indirectly generating revenues as in the social media and 
advertising  model.  Another  shortcoming  relates  to  the  insufficient  information  held  by  the 

74 A concrete example is a situation where a social platform sells advertisement spaces to a company based in 
country  A,  on  the  basis  of  user  data  located  in  country  B  –  the  ad  targeting  the  users  in  this  country  B.  The 
location of the users will determine the allocation of the tax revenue, i.e. country B. However, in such case, the 
tax would be withheld in country A. This will make challenging enforcing the application and collection of the 
tax in particular with third countries. 

73 

 
                                                 
collectors. For  the financial intermediaries  – the collectors  –  to  be able to identify to which 
transaction  the  tax  should  apply,  they  would  need  to  have  information  on  the  nature  of  the 
underlying supplies triggering the payment. This implies average-to-high set-up and recurrent 
costs for the collection system. The existence of thresholds to the application of the tax will 
further  render  complex  the  use  of  a  withholding  system,  which  is  by  nature  based  on 
individual transactions. Again, the collector does not have sufficient information whether the 
company receiving the payment is above the threshold. Last but not least, the increase in peer-
to-peer payments (without intermediaries, for example using block-chain technology) as well 
as  the  use  of  virtual  currencies  may  increase  the  possibility  to  escape  this  kind  of  tax. 
Considering all these difficulties, Schön (2017) concludes that "the technical and procedural 
difficulties for withholding taxation seem to be next to insurmountable".  

Self-declaration system 

Such  a  system  implies  relatively  low  set-up  costs  for  both  the  taxpayers  and  the  tax 
administrations. It is generally familiar to businesses as it is used, with positive experiences, 
for  several  other  taxes,  notably  VAT  and  should  be  considered  as  the  preferred/default 
solution, especially having in mind that the tax revenues collected will be relatively modest. 
Businesses  would  have  to  identify  and  declare  to  the  tax  authorities  the  gross  revenues 
derived from its digital services for the purposes of calculating the amount due – for instance 
by submitting a tax return during the month following the one of the taxable services  – and 
pay  the  tax  due.  However,  there  are  risks  of  under-reporting,  which  need  to  be  properly 
addressed by the tax administration through cross-checks with information from third parties 
(for example, users, statistic providers) and audits. An easy registration and payment feature 
in the form of a one-stop-shop for non-resident taxpayers could be envisaged, especially since 
a significant part of the tax revenue is expected to come from abroad. 

1.20.9  Other economic impacts of a tax on revenues from digital services 

Despite  generally  lower  tax  rates  for  revenue  taxes,  their  distortionary  effects  can  be 
significant if the tax is collected on business purchases. As the revenue tax base is broader 
than corporate income, revenue taxes generally involve lower tax rates. Hence, the change in 
real  production  incentives  and  in  market  equilibrium  prices  might  be  small.  However,  if  a 
significant  share  of  the  revenue  tax  is  collected  on  business  purchases,  the  distortionary 
effects can be substantial even under a 'broad base and low rate' tax due to cascading effects, 
i.e. taxing the same items multiple times through the supply chain (Keen, 2013).  

Cascading issues are expected to be of a relatively minor concern. First, because the tax 
would  have  a  fairly  narrow  scope  and  because  it  affects  business  models  with  a  large  user 
base, it is relatively unlikely that several relevant transactions are taxed in a row. Only in the 
case of the advertising model, where this might happen, additional safeguard might need to be 
taken  to  reduce  the  likelihood  of  taxing  more  than  once.  In  addition,  cascading  can  be 
mitigated by eliminating intra-group / related party transactions, that is by levying the tax only 
on revenues from third parties (be it individuals or businesses). 

74 

 
Levying  a  tax  on  revenues  can  be  efficient  under  a  number  of  circumstances.  In  the 
presence  of  tax  avoidance  and  evasion,  the  optimal  tax  base  may  optimally  sacrifice  some 
production  efficiency  (Emran  and  Stiglitz  2005;  Gordon  and  Li  2009).  Indeed,  Best  et  al. 
(2015)  study  the  trade-off  between  preserving  production  efficiency  and  preventing  the 
corrosion of tax collection due to tax avoidance and evasion. Using administrative tax records 
on corporations in Pakistan, they find that a switch from profit taxation to turnover taxation 
(at a much lower tax rate) reduces evasion levels by up to 60–70 percent of corporate income 
and  can  increase  corporate  tax  revenues  by  74  percent  without  decreasing  aggregate  profits 
(hence representing a welfare gain). This suggests that a pure turnover tax can be better than a 
profit  tax  in  terms  of  social  welfare.  The  reason  is  that  the  loss  of  production  efficiency  is 
more  than  compensated  for  by  the  increase  in  revenue  efficiency  due  to  larger  compliance. 
Furthermore,  in  cases  where  variable  costs  are  negligible  –  as  is  often  the  case  for  online 
platforms that rely on advertising or act as marketplaces/intermediaries – marginal profits are 
similar to marginal revenues. It can therefore be efficient to levy a tax on revenue as a second-
best option (France Stratégie, 2015).   Moreover, given that the levels of data exploitation are 
often  excessive,  a  tax  on  digital  activities  that  exploit  data  can  improve  consumer  welfare 
(Bloch and Demange, 2017). 

There  is  scarce  evidence  on  the  pass-on  effect  of  a  new  tax  on  turnover,  but  economic 
theory  and  experiences  with  VAT  indicate  that  there  is  no  uniform  answer  for  the 
variety  of  digital  services  considered.  As  a  proxy,  one  could  look  into  the  effect  of  an 
increase in the VAT rate on consumer prices. Economic theory suggests that the pass-through 
of a VAT increase on consumer prices is influenced by several factors: competition setting, 
the  elasticity  of  demand  and  other  factors  (e.g  country-specific  ones).  The  higher  the  price 
elasticity of demand, the lower the degree to which a VAT rate increase can be shifted into 
final consumer prices. An increase in the VAT rate would thus translate to different degrees in 
higher  consumer  prices  or  reductions  in  suppliers’  profit  margins,  depending  on  the  market 
conditions. On average, for a rather broad range of goods and services, Benedek et al. (2015) 
found that only around one-third of a VAT change is passed on to consumer prices.75 In the 
case of paper-based books and e-books, a Commission-ordered study documented a pass-on 
rate of one-half, which was however considered imprecise.76 

For  online  retail,  there  is  some  evidence  that  consumers  purchasing  online  are  price 
sensitive  and  react  strongly  to  price  increases  –  this  would  limit  the  possibility  for 
companies  to  pass  additional  tax  onto  consumer  prices.  Existing  work  on  internet  tax 
sensitivity dates back to the influential work of Goolsbee (2000). Sales taxes that are directly 
passed onto prices of products sold online have been shown to strongly reduce demand. More 
recently,  Einav  et  al  (2014),  using  data  from  eBay  which  accounts  for  11-13  percent  of 

75 See Benedek et al. (2015), p.16, https://www.imf.org/external/pubs/ft/wp/2015/wp15214.pdf.  
76 See European Commission (2012) – Economic Study on Publications on all Physical Means of Support and 
Electronic Publications in the context of VAT, p. 98 
(https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/economic_study_vat_on_publications_final
report.pdf). The pass-on rates vary also country-wise – op. cit., pp. 95-96. 

75 

 
                                                 
Internet retail commerce in the U.S., estimate that on average, the application of a 10 percent 
sales tax reduces purchases by 15 percent among buyers who have clicked on an item.  

1.20.10Administrative burden and compliance costs 

Businesses  must  identify  gross  revenues  resulting  from  supplying  digital  services  and 
relevant  user  statistics,  requiring  additional  reporting  requirements.  This  could  require 
adapting  the  financial  reporting  to  split  revenues  issued  from  digital  services  with  revenues 
issued  from  non-digital  services.  The  business  must  declare  and  pay  the  tax  to  the  Member 
State  that  has  the  taxing  right  (for  example,  where  the  users  are  located).    The  threshold 
proposed will restrict the number of businesses subject to the tax. In particular, it will have no 
impact  on  SMEs.  Since  it  might  cover  several  different  business  models  even  for  the  same 
enterprise, taxpayers will have to further allocate internally revenues to various proxies (for 
example,  number  of  active  users  and  monetisation  by  user,  local  domain  names,  IP 
addresses,77  number  of  visits,  number  of  clicks,  number  of  ad  displays,  location  of  the 
accommodation, transport, entertainment services provision) according to the requirements to 
be  laid  down  in  the  text  of  the  EU  directive.  In  doing  so,  the  data  collected  from  the  user 
needs  to  be  limited  to  data  indicating  the  Member  State  in  which  they  are  located,  without 
allowing for identification of the user, in accordance with Regulation (EU) No 2016/679 on 
data protection. Whenever possible, personal data shall be rendered anonymous.  

Although a quantitative estimate of the cost of collecting data is not available, the type of 
data-driven businesses subject to the new tax would in most cases be able to retrieve the 
data without much difficulty. The EU’s consumer and marketing legislation already require 
information obligations about the provided services, the identity of the provider, the contract 
conclusion and its execution. Also, the examples of voluntary cooperation between some of 
the  largest  platforms  and  the  tax  administrations  to  exchange  information  related  to  the 
underlying services the platform facilitate show that the information is available and can be 
processed at a limited cost (e.g. Uber with the Estonian tax authorities or Airbnb with major 
cities for the tourist tax) (Dondena & IHS, 2017). The draft regulation to ban unjustified geo-
blocking  between  member  states  agreed  by  the  Council  in  November  2016  is  an  additional 
example  that  locating  services  is  not  issue  and  common  practice.  Finally,  traffic  and 
engagement metrics are accessible online allowing to benchmark websites in terms of overall 
visits, time on site, bounce rate and page views per visit. An example is SimilarWeb.  

Total  additional  tax  compliance  costs  are  expected  to  be  rather  limited,  taking  into 
account the fairly simple structure of the tax. A forthcoming study on tax compliance costs 
estimates  that  total  indirect  compliance  costs  for  large  enterprises  amount  to  about  0.1%  of 
turnover (KPMG and GFK, 2018). This provides an order of magnitude in perspective of the 
new  tax.  Given  that  the  tax  would  be  applied  on  gross  revenues  without  the  possibility  to 

77 An Internet Protocol address (IP address) is a numerical label assigned to each device connected to a computer 
network  that  uses  the  Internet  Protocol  for  communication  (developed  as  early  as  the  1980s).  While  some  of 
these proxies can be subject to errors, manipulation or abuse by end-users or third parties, they still constitute a 
reliable means to locate the user. 

76 

 
                                                 
deduct  any  costs,  the  compliance  burden  in  percentage  of  turnover  should  be  rather 
substantially below the estimated 0.1% of turnover. 

The  compliance  costs  and  administrative  burden  for  non-resident  taxpayers  would  be 
slightly higher and also the assessment and collection will be more challenging compared 
to  resident  ones.  The  use  of  a  one-stop-shop  would  ensure  relatively  low  overall  costs78. 
These costs could be further reduced by means of harmonising registration, filing, accounting, 
data/record maintenance and payment requirements, for example by means of delegated acts. 

For  national  tax  administration,  the  interim  solution  has  initial  set  up  costs  limited  to 
reporting  adjustments,  declaration  and  payment  (in  terms  of  both  procedures  and  IT 
systems)  and  the  corresponding  staff  and  training  costs.  The  recurrent  costs  will  cover 
maintenance and IT systems, staff and continuous training. The use of a one stop shop for the 
preferred  interim  solution  would  lower  the  administrative  costs  for  the  tax  administrations 
and,  at  the  same  time,  allow  for  better  compliance  and  higher  tax  revenues  collected  from 
abroad. A first evaluation of the mini-one stop shop in place in EU Member States reports an 
average IT cost of about EUR 2.5 million for a Member State to implement the portal. Such 
estimate could be a solid basis to estimate the IT cost that a similar system would imply79.    

Also, the  administrative costs related to  audio-visual  levies  as identified in table (6) on 
unilateral measures taken by Member States could be a reliable basis to estimate further 
the  administrative  cost.  Although  the  material  scope  may  differ  from  the  interim  options, 
they are levies set on revenues from certain digital activities. Parallel in the functioning and 
administration  may  be  drawn.  The  impact  assessment  of  a  proposal  for  an  updated  audio-
visual  media  services directive  estimated the administrative  costs  (borne both  by businesses 
and regulators) associated with the audio-visual levy set at an average rate of 2% on revenues 
at an upper value of 600 thousand EUR for the entire EU (and all the actors).80 

The implementation of the tax would be relatively challenging for tax administrations in 
relation  to  taxpayers  that  are  not  resident.  Tax  administrations  can  make  use  of  the 
administrative  tools  available  at  EU81  or  OECD82  levels  for  both  the  interim  and 
comprehensive solutions. 

average 

78  For  instance,  the  overall  costs  that  businesses  face  when  engaging  in  cross-border  B2C  e-Commerce  of 
electronic services under the 2015 place of supply rules (but not using the mini one-stop-shop/MOSS) amount to 
about an average of EUR 5 200 per business per each Member State they sell to cross-border, which is less than 
the  overall  average  cost  for  businesses  engaged  in  cross  border  e-Commerce  (around  EUR  8  000).  By 
comparison, the overall costs that businesses face when engaging in similar activities using the MOSS amount to 
an 
see 
https://ec.europa.eu/taxation_customs/sites/taxation/files/swd_2016_379.pdf. 
79 https://ec.europa.eu/taxation_customs/sites/taxation/files/swd_2016_379.pdf 
80 See https://ec.europa.eu/digital-single-market/en/news/impact-assessment-accompanying-proposal-updated-
audiovisual-media-services-directive 
81  Administrative  cooperation  in  the  field  of  (direct)  taxation  -  Council  Directive  2011/16/EU  and  mutual 
assistance  in  the  field  of  recovery  of  claims  -  Council  Directive  2010/24/EU  and  Commission  Implementing 
Regulation (EU) No 1189/2011. 

business 

details, 

EUR 

year. 

200 

For 

per 

per 

of 

2 

77 

 
                                                 
1.20.11Coherence and articulation with the comprehensive solution  

that 

With  a  narrow  scope  that  is  based  on  the  centrality  of  the  user  contribution  for  the 
service  provided,  the  tax  would  be  most  coherent  with  the  comprehensive  approach. 
Given 
for  online  advertising  and 
marketplaces/intermediaries, the result of an allocation of the tax according to user location is 
that  the  outcome  of  the  interim  tax  would  well  approximate  the  outcome  of  the 
comprehensive solution.  

the  user  contribution 

so  central 

is 

The new tax on digital services would apply only until the comprehensive solution is in 
place. After significant progress towards implementation of the comprehensive solution, i.e. 
the  Directive  on  digital permanent  establishment  and  profit allocation  rules, adoption  of  the 
adapted  CCCTB  and  Recommendation  to  revise  double  tax  treaties,  the  interim  solution 
would cease to exist. As such, there may be elements of the comprehensive solution that are 
in place at the same time as the interim solution. But there is no risk of applying two taxes at 
once, as the comprehensive solution does not imply a new tax, but a re-allocation of corporate 
taxation rights.  

1.21 Preferred interim option  

1.21.1  Conclusion and description of the preferred interim solution 

The  preferred  interim  solution  is  a  Directive  on  a  common  system  of  a  tax  on  certain 
digital  services.  To  ensure  simplicity  and  coherence  with  the  comprehensive  solution,  it 
would be a tax with a narrow scope, levied on the gross revenues of a business resulting from 
the exploitation of digital  activities characterised by user value  creation, namely advertising 
revenue and revenue from services provided by online marketplaces/intermediaries. To be not 
discriminatory, the tax would apply both to non-resident and domestic companies and both to 
domestic and cross-border transactions.  

To  ensure  proportionality  of  the  measure,  avoid  hurting  the  digitalisation  of  the 
economy  and  not  be  discriminatory  against  non-resident  companies,  the      tax  would 
apply  to  businesses  being  above  both  of  two  thresholds  and  at  a  single  rate.  The  tax 
would apply to businesses being above both of two thresholds: 

1.  an  annual  worldwide  total  revenue  above  EUR  750  million,  at  the  level  of  the 

multinational group to which the business belong, if applicable. 

2.  revenue from the provision of digital services above a threshold of EUR 10-50 million  

82 The Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the OECD Model 
Tax Convention Article 26 (Information Exchange) and the OECD Model Agreement on Exchange of 
Information in Tax Matters. 

78 

 
  
                                                                                                                                                         
There  would  be  a  single  rate  across  the  EU  in  the  region  1-3%.  It  would  not  be  feasible  to 
make  the  tax  creditable,  but  to  alleviate  double  taxation  it  should  be  deductible  from  the 
corporate tax base. 

It is not rare that companies run several business activities/services in parallel and mix 
business  models.  In  such  cases,  revenues  to  take  into  account  for  the  specific  revenue 
threshold and the taxable base would be limited to those falling under the material scope. For 
example, a company X running in parallel a business segment A providing digital content in 
exchange for a fee and a business segment B providing access to content for free but financed 
through  the  sale  of  advertising  space  might  be  subject  to  the  interim  solution.  Only  the 
revenue generated through the business segment B would be taken into consideration for the 
purpose of the tax.     

To  align  more  the  locations  of  value  creation  and  taxation,  the  principle  for  assigning 
taxing rights should also be based on the location where the user has contributed to the 
value  creation.  Several  attribution  keys  are  possible,  but  essentially  this  will  require  some 
sort of apportionment of revenue across jurisdictions based on geographical user statistics. For 
the making available of multi-sided digital platforms which act as intermediaries that facilitate 
underlying  transactions  directly  between  users,  the  allocation  of  taxable  revenues  should  be 
carried out on the basis of the place from where the users having concluded such a transaction 
are.  Specific  rules  could  be  envisaged  depending  on  the  type  of  underlying  transaction 
concluded  in  such  a  marketplace  (e.g.  accommodation  services  involving  immovable 
property, where  taxing  rights  are assigned to  the jurisdiction where  the property is), but  the 
risk  of  increasing  the  complexity  of  the  tax  by  having  many  place  of  taxation  rules  would 
need to be taken into account. For other intermediation services where revenues are typically 
obtained through periodic payments after having registered or opened an account, it is more 
appropriate to take into account the place from where the users have opened an account.  As 
regards the transmission of data collected about users, the allocation of taxable revenues could 
take into account the place where a user has generated the data which will be sold.   

A  simplification  mechanism  should  be  made  available,  based  on  the  one-stop-shop 
model, which would be particularly important for non-resident taxpayers. . The taxpayer 
can register in the one-stop-shop and declare and pay the tax due in several Member States via 
one Member State.  

Annex 12 provides concrete examples of how the tax would work in practice. 

1.21.2  Subsidiarity, proportionality and compatibility with EU law  

Until the implementation of a common and coordinated action at EU level, which may 
take  some  time  to  agree,  Member  States  introduce  unilateral  measures  to  address  the 
challenges of taxing the digital economy companies. As it can be observed in Table (6) of 
Section  9.1,  some  of  such  measures,  which  can  be  of  a  very  diverse  nature,  are  already  in 
place. EU action is necessary in order to mitigate the fragmentation of the single market and 
the creation of distortions of competition within the EU due to the adoption of such unilateral 
actions at national level.   

79 

 
The preferred option would be consistent with the principle of proportionality, that is, it 
does not go beyond what is necessary to meet the objectives of the Treaties, in particular 
the smooth functioning of the single market. As follows from the subsidiarity test, it is not 
possible  for  Member  States  to  address  the  problem  without  hampering  the  single  market. 
Moreover,  the  present  proposal  aims  at  setting  a  common  structure  of  the  tax,  narrowly 
defined with thresholds not to unjustifiably hurt companies, while leaving sufficient margin of 
manoeuvre  for  Member  States  when  it  comes  to  actual  setting  of  certain  administrative 
aspects  related  to  the  measure,  such  as  accounting  and  reporting  obligations,  and  also 
concerning the prevention of evasion, avoidance, and abuse.  

Compatibility with EU law (notably fundamental freedoms of the TFEU and with VAT law) 
are discussed in Annex 11. 

10. 

HOW WILL ACTUAL IMPACTS BE MONITORED AND 

EVALUATED? 

1.22 Monitoring arrangements 

The  Commission  will  monitor  the  implementation  of  the  legal  proposal  and  its 
application in close cooperation with the Member States. Monitoring in a continuous and 
systematic way will allow identifying whether the policy proposal is applied as expected and 
addressing implementation problems in a timely manner. Tables (13) and (14) suggest a range 
of  monitoring  indicators  derived  from  operational  objectives  for  the  comprehensive  and  the 
interim solutions. Collection of factual data of the suggested monitoring indicators will also 
provide the basis for the future evaluation of the proposal. In compliance with the principle of 
subsidiarity, the relevant information should be gathered primarily by the Member States' tax 
administrations when data on tax compliance and the use of the system is concerned.  

Table (13):  Potential monitoring indicators for the preferred comprehensive solution 

Operational Objective 

Indicator 

Raising additional revenues  

General 
Objective 
Sustainability 
of public 
finances of EU 
Member States 
and the EU 

Revenues collected annually by national tax 
administrations from the allocation to the digital 
parameter in the profit allocation formula.    

Number of digital permanent establishments 
created  

Increase in profits booked through digital 
permanent establishments 

Contextual information: residence, sector and 
size of the company 
Number of unilateral measures related to digital 
taxation and applying to EU tax payers/different 
from the interim solution still in place in EU 
Member States  

Integrity and 
proper 
functioning of 
the single 

Ensuring certainty and stable tax 
frameworks in the single market 

Stopping ongoing fragmentation 

80 

 
 
 
 
 
 
 
 
 
market 

Ensuring 
fairness and a 
level playing 
field 

of the Single market through the 
multiplication of tax schemes 
Ensuring that similar 
activities/firms receive similar 
tax treatment 

Evolution of the effective corporate income tax 
rate: 

- between similar companies with and 
without digital permanent 
establishments 
- between EU and non-EU companies 

Effective tax rates of companies subject to 
mandatory application of the comprehensive 
solution relative to companies not applying the 
comprehensive solution with similar 
characteristics 

Fight against 
aggressive tax 
planning 

Ensuring that profits are taxed 
where the value is created 

Alignment between geographical location of 
users (as measured by web visit/data from 
Member States) and location of profits 

Reallocation of profits between Member States  

Table (14):  Potential monitoring indicators for the preferred interim solution 

General 
Objective 
Sustainability 
of public 
finances of EU 
Member States 
and the EU 

Integrity and 
proper 
functioning of 
the single 
market 

Ensuring 
fairness and a 
level playing 
field 

Fight against 
aggressive tax 
planning 

n/a 

Operational Objective 

Indicator 

Raising annual additional 
revenues  

Revenues collected annually by national tax 
administrations, from the interim tax on digital 
services  

Ensuring certainty and stable tax 
frameworks in the Single market 

Stopping ongoing fragmentation 
of the Single market through the 
multiplication of tax schemes 
Ensuring that significant digital 
services relying on user 
participation are taxed/ Taxing 
user-based value creation 

Contextual information: residence, sector and 
size of the company 
Number of unilateral measures related to digital 
taxation in EU Member States  

- creation 
- abolition/harmonisation 

Alignment between geographical location of 
users (as measured by web visit/data from 
Member States) and location of tax base 

Change in the ratio web visit/profits 
n/a 

In addition, for the recommendation, the number of double taxation treaties that have been 
negotiated or are under renegotiation should be monitored.  

81 

 
 
 
 
 
 
 
 
 
1.23 Evaluation 

The evaluation of the proposals should assess the extent to which the outlined objectives have 
been met. It will also assess the related administrative and regulatory burden. Considering the 
multiple  approaches  for  the  solutions  and  allowing  for  impacts  to  materialise  and  to  be 
observed after the implementation of the policy, an evaluation should be carried out five years 
after  the  implementation  of  each  stream  of  the  proposal  (i.e.  the  interim  solution,  the 
comprehensive  solution  and  the  recommendation).  The  Commission  will  report  on  the 
evaluation results in the form of an evaluation report. 

82 

 
 
ANNEX 1: PROCEDURAL INFORMATION 

1.  Lead DG, Decide Planning/CWP references 

The lead Directorate General is the Directorate General for Taxation and the Customs Union 
(DG TAXUD).  

This initiative got the following political agreements: 
-  Agenda Planning: Fair taxation of the digital economy (PLAN/2017/1873.) 
-  Inception 

Impact  Assessment:  Fair 

taxation  of 

the  digital  economy 

(Ref. 

Ares(2017)5253058 - 27/10/2017) 

-  Commission Work Programme 

2018 Annex I, initiative 7 

2.  Organisation and timing 

The works for this initiative have been launched in September 2017. 

The following Directorates General were invited to the Inter-Service Steering Group (ISSG): 
BUDG, CNECT, COMM, COMP, DGT, ECFIN, FISMA, GROW, JRC, OLAF, SJ, TRADE, 
EPSC.  

The Inter-Service Steering Group awas chaired by the Secretariat General. 

The Inter-Service Steering Group has met for a number of 4 times to discuss the file. The last 
meeting of the steering group took place on the 10th of January 2018. 

3.  Consultation of the RSB 

The  Impact  Assessment  report  was  examined  by  the  Regulatory  Scrutiny  Board  on 
07/02/2018.  

The Board issued a positive opinion with reservations, on the 9th of February 2018.  

According to the opinion:  

"The Board acknowledges the good and clear presentation of the report.  However, the 
report contains significant shortcomings that need to be addressed. As a result, the Board 
expresses  reservations  and  gives  a  positive  opinion  only  on  the  understanding  that  the 
report  shall  be  adjusted  in  order  to  integrate  the  Board's  recommendations  on  the 
following key aspects:  
(1) The report does not clearly explain the context of the initiative and the rationale for a 
two-pronged  approach.  It  does  not  show  the  urgency  for  the  EU  to  act,  before  global 
progress is achieved at the OECD/G20 level.  
(2) The projection of the implications of the baseline scenario is incomplete; the content 
of the options is not sufficiently detailed. And the transition between the short-term and 
long-term solutions lacks clarity.  

83 

 
 
 
 
 
 
 
 
(3)  The  analysis  of  impacts  is  insufficiently  developed,  especially  as  regards  the 
thresholds,  compliance  costs  and  thus  does  not  demonstrate  the  proportionality  of  the 
preferred option.  

Following the comments received from the Board, the Impact Assesment report has been 
significantly revised, in order to address the issues raised: 

(1)  The  two-step  approach  as  well  as  the  urgency  of  the  EU  action  have  been  better 
explained and the relevant sections  have been expanded. 
(2)  The  baseline  has  been  expanded  in  order  to  take  into  account  all  the  relevant 
initiatives currently adopted. The switch from the interim solution to the comprehnesive 
as well as the consequences have been better described. 
(3)  The  analysis  of  impacts  sections,  in  particular  the  administrative  and  compliance 
costs,  have  been  further  develped  both  for  the  comprehensive  solution  as  well  as  the 
interim one.    

The current version of the report thus contains the revised text in which the Board's comments 
were addressed.  

84 

 
 
 
 
 
 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION 

Fair taxation of the digital economy proposal 

Synopsis report 

Consultation activities carried out 

The consultation strategy has focused on three main groups of stakeholders: Member States’ 
tax administrations, businesses and citizens. The two main consultation activities consisted in 
the  open  public  consultation  and  a  targeted  survey  sent  to  all  EU  tax  administrations.  The 
members of the Platform for Tax Good Governance (made up of all EU tax authorities and 15 
organizations  representing  business,  civil  society  and  tax  practitioners)  have  also  been 
informed about this initiative and their opinions sought out.  In addition to these, stakeholders 
had  the  opportunity  to  give  feedback  on  the  inception  impact  assessment  and  send  their 
position papers directly to the dedicated functional mailbox for this initiative.       

Stakeholder participation 

The open public consultation has been launched on the 26th of October 2017 and was closed 
on the 3rd of January 2018. Given the short timeline of the overall project, a derogation from 
the  3  month  period  mentioned  in  the  Better  Regulation  Guidelines  was  granted  by  the 
Secretariat  General  of  the  European  Commission.  The  consultation  was  available  in  all 
official EU languages (except Gaelic).   

There were a total of 446 replies to the public consultation and 121 positions papers uploaded 
along with the replies. The open public consultation was published on the general consultation 
website  of  the  European  Commission  and  has  been  advertised  through  newsletters,  at  the 
meeting of the Platform for Tax Good Governance and through a Twitter campaign.   

A separate, targeted consultation was carried out in parallel to the open public consultation. 
The consultation ran from the 23rd of November until the 20th of December and was sent to all 
the  national  tax  administration  in  the  EU.  Out  of  28  Member  States,  21  national  tax 
administrations have replied directly to this consultation and 1 Member State chose to send its 
contribution in the form of a position paper. 

A  number  of  14  position  papers  have  been  sent  directly  to  the  functional  mailbox  for  this 
initiative.  

2 contributions have been received as part of the feedback mechanism on the inception impact 
assessment.  

85 

 
 
 
 
 
CONSULTATION RESULTS 

1.  Open public consultation 

a.  Description of the respondents 

The  vast  majority  of  contributions  came  from  respondents  based  in  the  EU  28.  Only  16 
contributions  from  outside  the  EU  have  been  submitted.  The  top  6  countries,  based  on  the 
location  of  the  respondent  were:  Spain  (75  replies)  and  Germany  (75  replies),  Italy  (45 
replies), Belgium (38 replies) and France (30 replies) and the United Kingdom (30 replies).  

Based on the language used for replying to the questionnaire, most of the respondents chose 
the  English  version  (315  replies)  followed  by  Spanish  (42  replies),  German  (39  replies), 
French (19 replies) and Italian (17 replies). The remaining 14 replies were in the other official 
EU languages.  

Table (1). Type of respondents to the public consultation 

Based on the type of respondent, as can be seen in the figure above, 49% of replies came from 
individuals, 24% from business organizations such as trade associations or consultancies and 
18 % came from businesses. The remaining 10% is spread between civil society organizations 
(10  replies),  academic/research  institutions  (12  replies),  public  authorities  (2  replies), 
international organizations (1 reply) and other types of organizations (14).        

The  majority  of  businesses  that  replied  to  the  survey  were  Small  and  Medium  Enterprises 
(SMEs):  41,  while  the  remaining  38  replies  came  from  large  enterprises,  having  over  250 
employees. About two thirds of companies  (55 respondents out of 79) operate in more than 
one country.  

86 

 
 
 
 
 
b.  Current problems 

In this section the respondents were asked about the current rules of international taxation and 
their applicability for the digital economy. The respondents were also asked to choose the 3 
main  challenges  that  digitalization  brings  for  companies  and  tax  authorities.  They  were 
quizzed about the need to act and the most appropriate level for action.  The last part of this 
section  asked  the  respondents  to  rank  the  objectives  that  the  European  Commission  should 
pursue in relation to any possible future policy action.   

65 % of respondents (291 replies) believe that the current international tax rules are to a little 
extent or not at all adapted to the digital economy. 30 % of respondents (136 replies) were of 
the  opposite  opinion,  that  the  rules are  adapted to  some  or  to  a  great  extent.  The  remainder 
had either no opinion or didn’t know.  

A series of 5 statements about the current tax rules were tested, in order to see to what extent 
they could be used to describe the existing situation. 

1.  The  current  international  taxation  rules  do  not  allow  for  fair  competition  between 
traditional and digital companies. 65 % of respondents agreed or strongly agreed with 
this statement, while 20 % of respondents disagreed or strongly disagreed with it.   
2.  The current situation could push some Member States toward adopting uncoordinated 
measures  that  would  lead  to  the  fragmentation  of  the  Single  market.  82%  of 
respondents  agreed  or  strongly  agreed  with  this  statement,  while  only  6  %  of 
respondents disagreed or strongly disagreed with it.   

3.  The current international taxation rules allow digital companies to benefit from certain 
tax  regimes  and  push  down  their  tax  contributions.  73%  of  respondents  agreed  or 
strongly agreed with this statement, while 15 % of respondents disagreed or strongly 
disagreed with it.   

4.  States are not able to collect taxes on the value that some digital companies create on 
their territory. 67% of respondents agreed or strongly agreed with this statement, while 
18 % of respondents disagreed or strongly disagreed with it.   

5.  Social fairness is impacted because some digital companies do not pay their fair share 
of  taxes.  The  same  numbers  appear  for  the  last  of  the  5  statements:  67%  of 
respondents agreed or strongly agreed with this statement, while 18 % of respondents 
disagreed or strongly disagreed with it.   

The main challenges that the digital economy poses for businesses are: 

  Uncertainty related  to  tax  obligations  when  operating in  different  countries  (selected 

by 63 % of respondents); 

  Uncertainty  on  the  exact  allocation  per  jurisdiction  of  the  business'  value  creation 

(selected by 61 % of respondents); 

  Uncertainty related to future taxation solutions for new business models (selected by 

44 % of respondents). 

  The  respondents  were  also  given  the  possibility  to  name  other  challenges  for 
companies, and some of the most quoted were: “risk of overregulation, especially for 
EU-based  businesses.  Already  too  complex  taxation  scheme  exist.”,  “a  huge  risk  of 
double taxation; unilateral EU-action will trigger countermeasures by trade partners” 
and ”the main challenge is to devise simple, quantifiable and easy to administer keys 
to allocate profits”. 

87 

 
 
 
The main challenges that the digital economy poses for national tax systems are: 

  Companies can access customers in national markets without being effectively taxed 

in the market country (selected by 64 % of respondents); 

  Unfair  advantage  of  companies  operating  cross-border  over  local  companies,  due  to 

lower taxation (selected by 61 % of respondents); 

  Difficulties to establish the tax liability of a company due to the complex value chain 

(selected by 55 % of respondents). 

  The respondents were also given the possibility to name other challenges for national 
tax  systems,  and  some  of  the  most  quoted  were:  “ascertaining  and  policing  the  tax 
liability  of  companies  in  other  countries”,  “keeping  pace  with  advances  in  ways  of 
doing  business  given  continuing  technological  evolution”,  “OECD  guidelines  and 
European Union’s fundamental freedoms should be respected by governments.” 

An overwhelming majority of 82% of respondents (366 replies) believe that something should 
be done about the current international tax rules in what concerns the digital economy. When 
they were asked to identify the most appropriate level for action, 41% (182 replies) indicated 
that  they  would  like  to  see  action  taken  at  international  level,  while  33  %  (146  replies) 
preferred action to be taken at the European Union level. Only 2% (8 replies) believe that the 
national level is an adequate one for action concerning the digital economy.   

A series of 4 objectives have been identified by the European Commission. They were tested 
with the respondents, who were asked to rank them and choose the most important ones. 

  The objective of ensuring a level playing field so that all companies pay their fair 
share of taxes (whether large/small, more/less digitalized, EU/non-EU based) was 
considered to be the most important one by a number of 176 respondents.  

  Ranked second was the objective of ensuring a competitive tax environment in the 
EU  for  the  scaling-up  of  start-ups  and  all  business  to  flourish  chosen  by  153 
respondents.  

  Ranked  third,  the  objective  of  ensuring  the  sustainability  of  the  corporation  tax 
system and the tax bases of EU Member States was selected by 129 respondents.  
  Ranked 4 was the objective of ensuring the integrity and proper functioning of the 

Single market with 115 replies. 

The  respondents  also  had  the  possibility  to  suggest  other  objectives  that  should  be pursued. 
Some of the other objectives suggested have been : “increased transparency on data use and 
incomes  derived”,  “social  fairness”,  “reducing  all  regulative  and  tax  burdens  for  all 
companies” or “global level playing field for all companies (big & small) and competitive tax 
environment in the EU” 

c.  Possible solutions 

The  section  on  possible  solutions  was  centered  around  the  two  sets  of  options  which  have 
been identified early on in the policy design stage: the short term, interim solutions and the 
long term, comprehensive solutions and their possible impacts. 

The  two  step  approach  (namely  the  interim  option  first,  followed  by  the  comprehensive 
option) was tested with the respondents. 54% (239 replies) of them believed that an interim 

88 

 
 
 
 
 
option should be adopted until a more comprehensive solution is reached, while 35 % (154) 
did not agree to that.  

Next,  the  respondents  were  asked  to  identify  to  what  extent  each  of  the  short  term,  interim 
solutions  would  solve  current  problems  related  to  the  international  taxation  rules  for  the 
digital economy.  

  Tax on revenues from digital activities: Introduce a tax based on revenues generated 
from "digital activities": 45 % of respondents (201 replies) believe this option would 
solve the current problems to a great extent or somehow, while 41% of respondents ( 
181 replies) believed that this option would not solve the problems at all or only to a 
little extent.  

  Withholding  tax  on  certain  types  of  digital  transactions:  Introduce  a  withholding 
tax based on payments to non-resident providers of goods/services ordered online: 45 
% of respondents (202 replies) believe this option would solve the current problems to 
a great extent or somehow, while 39% of respondents (172 replies) believed that this 
option would not solve the problems at all or only to a little extent.  

  Tax on revenues from certain digital services: Introduce a tax based on the revenue 
from  digital  transactions  concluded  remotely  with  a  non-resident  entity  that  has  a 
significant economic presence (e.g. revenue from the sale of online advertising): 53 % 
of respondents (238 replies) believe this option would solve the current problems to a 
great  extent  or  somehow,  while  34%  of  respondents  (151  replies)  believed  that  this 
option would not solve the problems at all or only to a little extent.  

  Digital  transaction  tax:  Introduce  a  tax  that  applies  early  in  the  value  creation 
process  (collection  of  personal  and  other  data):  33  %  of  respondents  (147  replies) 
believe  this  option  would  solve  the  current  problems  to  a  great  extent  or  somehow, 
while 51% of respondents (228 replies) believed that this option would not solve the 
problems at all or only to a little extent. 

  Other options that have been identified by the respondents have been: “tax on quantity 
of internet traffic in a MS, tax on advertising profits and fines/taxes for geoblocking, 
depending on the legislation in the area (fines if not complied with, fees if allowed)”, 
“only  a  coordinated  approach  in  line  with  OECD  principles  can  solve  both:  An 
appropriate taxation of digitalized business models and preventing double taxation.”,” 
tax  data  per  volume  provided  in  streamed  or  downloaded  content,  for  instance 
YouTube  provides  20  gigabytes  worth  of  songs  to  a  user  in  EU,  charge  tax  per 
megabyte, (Google's revenue is from ads)”  

Next,  the  respondents  were  asked  to  identify  to  what  extent  each  of  the  long  term, 
comprehensive  solutions  would  solve  current  problems  related  to  the  international  taxation 
rules for the digital economy.  

  Modify the Common Consolidated Corporate Tax Base proposal: Implement new 
permanent  establishment  and  profit  attribution  rules  through  modifications  to  the 
CCCTB proposal: 44 % of respondents (195 replies) believe this option would solve 
the  current  problems  to  a  great  extent  or  somehow,  while  27%  of  respondents  (120 
replies) believed that this option would not solve the problems at all or only to a little 
extent.  

  "Digital  presence  in  the  EU"  proposal:  Implement  new  EU  rules  for  permanent 
establishment  and  profit  attribution  to  capture  digital  activities  of  businesses  in  a 
stand-alone EU Directive: 58 % of respondents (259 replies) believe this option would 

89 

 
 
 
 
 
 
 
 
 
solve  the  current  problems  to  a  great  extent  or  somehow,  while  28%  of  respondents 
(123 replies) believed that this option would not solve the problems at all or only to a 
little extent. 

  Destination-based  corporate  tax:  Introduce  the  destination-principle  to  corporate 
taxation,  according  to  which  the  jurisdiction  to  tax  is  based  on  the  location  of  the 
consumer:  54  %  of  respondents  (241  replies)  believe  this  option  would  solve  the 
current  problems  to  a  great  extent  or  somehow,  while  34%  of  respondents  (152 
replies) believed that this option would not solve the problems at all or only to a little 
extent. 

  Unitary tax: Introduce a tax on a share of the world profit of digital companies which 
would be attributed to each country on the basis of the percentage of revenue earned in 
that  country:  50  %  of  respondents  (221  replies)  believe  this  option  would  solve  the 
current  problems  to  a  great  extent  or  somehow,  while  37%  of  respondents  (165 
replies) believed that this option would not solve the problems at all or only to a little 
extent. 

  Residence tax base with destination tax rate: Introduce a system where profits of a 
company are declared and taxed in the Member State of establishment (as is the case 
today), but the applicable rate is the turnover-weighted average of the tax rates of the 
countries where the turnover is generated: 28 % of respondents (124 replies) believe 
this option would solve the current problems to a great extent or somehow, while 53% 
of respondents (235 replies) believed that this option would not solve the problems at 
all or only to a little extent. 

  Other  options  that  have  been  identified  by  the  respondents  have  been:  “it  would  be 
useful to use the definition of big data to individuate also the market and the value of 
the  transactions  non-resident  company”,  “the  tax  must  be  paid  immediately  with  the 
transaction to consumer.”, “different solutions for taxing revenues coming from final 
consumer or from companies may be needed. Clients that are companies may establish 
themselves in a low tax country more easily than citizens.” 

To sum up the preference of respondents for the different options, the figure below presents 
he results, in a very simplified manner. Those who “somehow” believe or believe “to a great 
extent” that an option would solve the current problems have been considered supporters of 
the  respective  option  and  included  under  the  “For”  column.  Those  who  believe  “to  a  little 
extent” or “not at all” that an option would solve the current problems have been considered 
opponents of the respective option and included under the “Against” column. 

Table (2). Respondents' preferences for the options – open public consultation 

Option name 

For 

Against 

No opinion 

Interim, temporary solutions 
Tax on revenues from 
digital activities 
Withholding tax on 
certain types of 
digital transactions 
Tax on revenues from 
certain digital 
services 
Digital transaction 

45 % of respondents  41% of respondents  14% of respondents 

45 % of respondents 

53 % of respondents 

39% of respondents 

16% of respondents 

34% of respondents 

13% of respondents 

33 % of respondents  51% of respondents  16% of respondents 

90 

 
 
 
 
 
 
 
tax 
Long term, comprehensive solutions 
Modify the Common 
Consolidated 
Corporate Tax Base 
proposal 
“Digital presence in 
the EU" proposal 
Destination-based 
corporate tax 
Unitary tax 
Residence tax base 
with destination tax 
rate 

44 % of respondents  27% of respondents  29% of respondents 

58 % of respondents  28% of respondents  14% of respondents 

54 % of respondents  34% of respondents  12% of respondents 

50 % of respondents  37% of respondents  13% of respondents 
28 % of respondents  53% of respondents  19% of respondents 

The  final  question  was  if  Small  and  Medium  Enterprises  (SMEs)  should  be  exempt  from  a 
possible  digital  tax.  There  was  no  clear  split  between  those  for  and  those  against  such  an 
exemption.  167  respondents  (38%)  believed  that  they  should  be  exempted,  while  173 
respondents (representing 39%) opposed this.    

All  respondents  were  given  the  possibility  to  attach  a  position  paper  to  better  express  their 
views and support their arguments. A total of 121 position papers have been uploaded. Their 
content  ranges  from  only  a  few  lines  expressing  the  author's  views  to  full-fledged  reports  a 
few tens of pages long. The views expressed vary to a very large extent and show that there is 
no  consensus  among  stakeholders  on  what  should  be  done  next.  There  are  however  a  few 
points which have strongly came out of the positions papers received, and which have been 
integrated in the Commission analysis: 

 

 

the digital economy should not be ring fenced from the rest of the economy. As one 
respondent put it: "there is no such thing as the digital economy. The global economy 
is digital and such be treated as such for tax purposes". 
the  solutions  chosen  should  not  impose  any  administrative  or  compliance  burden  as 
they might risk to "disproportionately affect the ability of smaller enterprises to carry 
out and expand their business domestically and cross-border".  

2.  Member States’ questionnaire 

a.  Description of the respondents 

The  questionnaire  was  structured  into  two  parts:  the  first  one  was  addressed  to  those 
administrations which have introduced laws that specifically target the digital economy. The 
second part included the same questions that were used in the open public consultation, with 
slight adaptations, whenever appropriate. 

Only two Member State replied to the questions on their legislation in place targeting digital 
companies. One of those has adopted a law that entered into force only recently, in September 
2017. In the case of the other state, the law would only come into effect in 2019. None of the 
remaining  19  Member  States  that  answered  had  in  place  legislation  targeted  at  digital 
companies.  

91 

 
 
 
 
 
 
 
When  asked  about  their  intention  of  introducing  legislation  to  target  the  digital  economy,  3 
states replied positively, 12 replied negatively and 6 states were not decided. 

b.   Current problems 

Similar  to  the  open  public  consultation,  the  national  administrations  were  asked  about  the 
current  rules  of  international  taxation  and  their  applicability  for  the  digital  economy.  They 
were also asked to choose the 3 main challenges that digitalization brings for companies and 
their tax authorities. They were quizzed about the need to act and the most appropriate level 
for action.  The last part of this section asked the respondents to rank the objectives that the 
European Commission should pursue in relation to any possible future policy action.   

The majority of countries (13) believed that the current rules are not at all or only to a little 
extent adapted to the digital economy. The remaining 8 countries believed that the rules are to 
some extent or to a great extent adapted to the digital economy.   

A series of 5 statements about the current tax rules were tested, in order to see to what extent 
they could be used to describe the existing situation. 

1.  The  current  international  taxation  rules  do  not  allow  for  fair  competition  between 
traditional  and  digital  companies.  13  countries  agreed  or  strongly  agreed  with  this 
statement, while 8 countries disagreed or strongly disagreed with it.   

2.  The current situation could push some Member States toward adopting uncoordinated 
measures  that  would  lead  to  the  fragmentation  of  the  Single  market.  15  countries 
agreed  or  strongly  agreed  with  this  statement,  1  country  disagreed,  4  countries  were 
neutral and one had no opinion.    

3.  The current international taxation rules allow digital companies to benefit from certain 
tax  regimes  and  push  down  their  tax  contributions.  14  countries  agreed  or  strongly 
agreed with this statement, 1 country disagreed and 6 countries were neutral.   

4.  States are not able to collect taxes on the value that some digital companies create on 
their territory. 15 countries agreed or strongly agreed with this statement, 2 countries 
disagreed with it, 3 were neutral and 1 had no opinion.     

5.  Social fairness is impacted because some digital companies do not pay their fair share 
of  taxes.  14  countries  agreed  or  strongly  agreed  with  this  statement,  2  countries 
disagreed with it, 4 were neutral and 1 had no opinion.     

An  overwhelming  majority  of  states  (16)  believe  that  something  should  be  done  about  the 
current international tax rules in what concerns the digital economy. The remaining 5 states 
had no opinion on this issue.  

When  they  were  asked  to  identify  the  most  appropriate  level  for  action,  only  one  country 
believed that the EU level is the appropriate one ("as there is the Single market"), while the 
remaining 20 respondents believed that the international level is the right one.   

The main challenges that the digital economy poses for businesses are: 

  Valuation of data / exploitation of data (i.e. quantifying how much the information that 

a company has about its clients is worth) selected by 13 respondents; 

  Uncertainty  on  the  exact  allocation  per  jurisdiction  of  the  business'  value  creation 

(selected by 13 respondents); 

  Uncertainty related  to  tax  obligations  when  operating in  different  countries  (selected 

by 12 respondents); 

92 

 
 
  One  state  mentioned  one  other  challenge  for  companies:  “for  business,  the  main 
challenge is double taxation that may potentially arise.  This double taxation can arise 
due  to  different  approaches  being  adopted  by  different  countries  both  in  terms  of 
interpretation or from the introduction of new taxes either unilaterally or multilaterally 
where those taxes sit outside the existing corporation tax framework”. 

The main challenges that the digital economy poses for national tax systems are: 

  Difficulties to establish the tax liability of a company due to the complex value chain 

(selected by 15 respondents); 

  Businesses acquire new sources of revenue  (e.g. through exploitation of data) which 

are not properly taxed (selected by 14 respondents); 

  Companies can access customers in national markets without being effectively taxed 

in the market country (selected by 10 respondents); 

The  respondents  were  also  given  the  possibility  to  name  other  challenges  for  national  tax 
systems,  and  they  quoted:  “a  significant  challenge  is  the  possibility  of  double  non-taxation.  
This challenge is what led to the BEPS project and related EU action, such as agreement of 
ATAD.  Given that implementation of these significant agreements has not yet taken place, it 
remains to be seen to what extent this risk/challenge will remain after BEPS Implementation”, 
“asymmetric  level  of  information  between  global  MNEs  vs  national  tax  authorities.  eg; 
sharing  economy  platforms  operating  locally  have  valuable  data  which  would  be  helpful  in 
ensuring compliance of both the platform as well as possibly other taxpayers (eg; users)” and 
“companies can  develop  massive and profitable activities  on a territory without being taxed 
by this country”. 

A series of 4 objectives have been identified by the European Commission. They were tested 
with  the  national  administrations,  who  were  asked  to  rank  them  and  choose  the  most 
important ones. 

  Similar to the result of the open public consultation, the objective of ensuring a level 
playing  field  so  that  all  companies  pay  their  fair  share  of  taxes  (whether 
large/small, more/less digitalized, EU/non-EU based) was considered to be the most 
important one by a number of 12 respondents;  

  Ranked  second,  the  objectives  of  ensuring  a  level  playing  field  so  that  all 
companies pay their fair share of taxes and the one on ensuring the sustainability 
of  the  corporation  tax  system  and  the  tax  bases  of  EU  Member  States  were 
selected both by 6 respondents each;  

  Ranked  third,  the  objective  of  ensuring  the  sustainability  of  the  corporation  tax 
system and the tax bases of EU Member States was selected by 6 respondents; 
  The  4th  position  was  split  equally  between  the  objective  of  ensuring  the  integrity 
and  proper  functioning  of  the  Single  market  and  the  objective  of  ensuring  a 
competitive  tax  environment  in  the  EU  for  the  scaling-up  of  start-ups  and  all 
business to flourish. with 7 replies each; 

  The  national  administrations  also  had  the  possibility  to  suggest  other  objectives  that 
should be pursued. Some of the other objectives suggested have been: “the European 
Council  Conclusions  agreed  by  leaders  clearly  set  out  that  it  is  important  that  a 
taxation system fit for the digital era ensures a global level playing field in line with 
the work at the OECD. The European Council Conclusions also note it is important to 

93 

 
  
 
ensure  that  all  companies  pay  their  fair  share  of  taxes.  Focus  should  also  be  on  the 
overriding  objective  of  tax  reform  efforts  globally  to  eliminate  double  non-taxation, 
while not creating double taxation”, “we consider all objectives of equal importance. 
Creating  a  tax  system  where  a  fair  share  paid  by  all  companies  is  ensured  without 
affecting, distorting or shifting the development of innovative activities or ideas” and 
“in  close  cooperation  with  OECD  ensuring  that  EU  solution  should  be  a  part  of  the 
global solution”. 

c.   Possible solutions 

The  section  on  possible  solutions  was  centered  around  the  two  sets  of  options  which  have 
been identified early on in the policy design stage: the short term, interim solutions and the 
long term, comprehensive solutions and their possible impacts. 

The  two  step  approach  (namely  the  interim  option  first,  followed  by  the  comprehensive 
option)  was  tested  with  the  respondents.  11  states  believed  that  a  interim  option  should  be 
adopted until a more comprehensive solution is reached, 7 states did not agree to that and 3 
had no opinion.  

Next, the national tax administrations were asked to identify to what extent each of the short 
term, interim solutions would solve current problems related to the international taxation rules 
for the digital economy.  

  Tax on revenues from digital activities: Introduce a tax based on revenues generated 
from  "digital  activities":  9  respondents  believe  this  option  would  solve  the  current 
problems to a great extent or somehow, 7 respondents believed that this option would 
not solve the problems at all or only to a little extent. 3 respondents didn’t know and 2 
gave no answer; 

  Withholding  tax  on  certain  types  of  digital  transactions:  Introduce  a  withholding 
tax based on payments to  non-resident providers of goods/services ordered online:  7 
believe  this  option  would  solve  the  current  problems  to  a  great  extent  or  somehow, 
while 8 believed that this option would not solve the problems at all or only to a little 
extent. 4 respondents didn’t know and 2 gave no answer; 

  Tax on revenues from certain digital services: Introduce a tax based on the revenue 
from  digital  transactions  concluded  remotely  with  a  non-resident  entity  that  has  a 
significant  economic  presence  (e.g.  revenue  from  the  sale  of  online  advertising):  10 
respondents believe this option would solve the current problems to a great extent or 
somehow, 7 respondents believed that this option would not solve the problems at all 
or only to a little extent. 2 respondents didn’t know and 2 gave no answer;  

  Digital  transaction  tax:  Introduce  a  tax  that  applies  early  in  the  value  creation 
process (collection of personal and other data): only 4 respondents believe this option 
would solve the current problems to a great extent or somehow, while 9 respondents 
believed that this option would not solve the problems at all or only to a little extent. 6 
respondents didn’t know and 2 gave no answer; 

The national tax administrations were also asked to identify to what extent each of the long 
term,  comprehensive  solutions  would  solve  current  problems  related  to  the  international 
taxation rules for the digital economy.  

94 

 
 
 
 
 
 
 
 
 
 
 
  Modify the Common Consolidated Corporate Tax Base proposal: Implement new 
permanent  establishment  and  profit  attribution  rules  through  modifications  to  the 
CCCTB proposal: 9 respondents believe this option would solve the current problems 
to  a  great  extent  or  somehow,  while  9  other  respondents  believed  that  this  option 
would not solve the problems at all or only to a little extent. 3 had no opinion.  

  "Digital  presence  in  the  EU"  proposal:  Implement  new  EU  rules  for  permanent 
establishment  and  profit  attribution  to  capture  digital  activities  of  businesses  in  a 
stand-alone EU Directive: 14 respondents believe this option would solve the current 
problems to a great extent or somehow, while 5 respondents believed that this option 
would not solve the problems at all or only to a little extent. 2 states had no opinion. 
  Destination-based  corporate  tax:  Introduce  the  destination-principle  to  corporate 
taxation,  according  to  which  the  jurisdiction  to  tax  is  based  on  the  location  of  the 
consumer:  6  respondents  believe  this  option  would  solve  the  current  problems  to  a 
great extent or somehow, while a majority of 12 respondents believed that this option 
would not solve the problems at all or only to a little extent. 3 administration had no 
opinion. 

  Unitary tax: Introduce a tax on a share of the world profit of digital companies which 
would be attributed to each country on the basis of the percentage of revenue earned in 
that country: 6 respondents believe this option would solve the current problems to a 
great extent or somehow, while a majority of 13 respondents believed that this option 
would not solve the problems at all or only to a little extent. 2 states had no opinion. 
  Residence tax base with destination tax rate: Introduce a system where profits of a 
company are declared and taxed in the Member State of establishment (as is the case 
today), but the applicable rate is the turnover-weighted average of the tax rates of the 
countries  where  the  turnover  is  generated:  only  one  respondent  believes  that  this 
option would somehow solve the current problems, while an overwhelming  majority 
of 17 states believed that this option would not solve the problems at all or only  to a 
little extent. 3 states had no opinion. 

  Other options that have been identified by the respondents have been: “any problems 
that  remain  post  BEPS  implementation  will  be  global  problems.  Any  solution  will 
need  to  be  global  in  nature  rather  than  being  EU  focused.  Any  long  term  measures 
must be evidence based and in line with global consensus”, “instead of location of the 
consumer, elements such as the user server capacity could also be used”, “the global 
discussion  on  the  options  to  address  the  taxation  of  the  digital  economy  is  still 
unfinished and ongoing. Once the direction of the global solution is known the options 
presented  as  the  long  term  solutions  should  be  reassessed.  Overall,  the  entire  global 
value  chain  and  its  impact  on  how  taxes  should  be  paid  to  different  jurisdictions 
should be born in mind when considering different options. It would also be essential 
to recognize the different business models within the digitalized economy. The legal 
and technical feasibility as well as economic impact of the possible responses should 
be  assessed.  Further,  it  should  be  noted  that  due  to  the  development  of  the  digital 
economy  and  to  ensure  effective  taxation  of  cross-border  e-commerce  the  EU  VAT 
system has been modernized considerably during the last years. Based on this cross-
border e-commerce sales of services and goods are taxed extensively in the Member 
State of consumption”. 

To sum up the preference of respondents for the different options, in a similar manner as done 
for the open public consultation, the figure below presents the results of the Member States' 
questionnaire,  in  a  very  simplified  manner.  Those  who  “somehow”  believe  or  believe  “to  a 

95 

 
 
 
great  extent”  that  an  option  would  solve  the  current  problems  have  been  considered 
supporters of the respective option and included under the “For” column. Those   who believe 
“to a little extent” or “not at all” that an option would solve the current problems have been 
considered  opponents  of  the  respective  option  and  included  under  the  “Against”  column. 
Given the relatively big number of those that either had no opinion or chose “no” to answer 
some of the questions, a third column was added in order to represent their choice.   

Table (3). Respondents' preferences for the options - Member States' questionnaire 

For 

4states 

7 states 

8 states 

7 states 

6 states 

5 states 

9 states 

7 states 

4 states 

10 states 

Against 

No opinion 

Option name 
Interim, temporary solutions 
Tax on revenues from 
digital activities 
Withholding tax on 
certain types of digital 
transactions 
Tax on revenues from 
certain digital services 
Digital transaction tax 
Long term, comprehensive solutions 
Modify the Common 
Consolidated Corporate 
Tax Base proposal 
“Digital presence in the 
EU" proposal 
Destination-based 
corporate tax 
Unitary tax 
Residence tax base with 
destination tax rate 
The  final  question  was  if  Small  and  Medium  Enterprises  (SMEs)  should  be  exempt  from  a 
possible  digital  tax.  11  administrations  believed  that  they  should  be  exempted,  while  6 
administrations opposed this. 4 administrations had no opinion on this topic.   

13 states 
17 states 

6 states 
1 state 

2 states 
3 states 

14 states 

12 states 

9 states 

3 states 

2 states 

9 states 

9 states 

8 states 

6 states 

3 states 

5 states 

3.   Other consultation activities  

a.  Commission activities  

At  the  beginning  of  the  process,  once  the  Commission  published  the  inception  impact 
assessment,  the  document  that  established  the  general  lines  of  the  proposal,  2  contributions 
have been received: one of them asking for more clarifications on the basic concepts used in 
the document and the other one asking to exclude the small and medium enterprises (SMEs) 
from  the  scope  of  the  proposal.  Both  of  these  requests  have  been  dealt  with  in  the  analysis 
included in the report.  

14 position papers have been sent to the functional mailbox of the initiative. They are similar 
in content and to the contributions received as part of the open public consultation, and have 
been analyzed in a similar manner.   

96 

 
 
 
  
b.  OECD request for input and public consultation 

Box: OECD public consultation 
The OECD organised a request for input on work regarding the tax challenges of the 
digitalised economy from September to October 2017 in the context of the ongoing work of 
the Task Force on the Digital Economy (TFDE). 
The request for input presented the background on the work regarding the tax challenges of 
digitalisation from the BEPS Action 1 report.The Action 1 report, was released in October 
2015 as part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) package. This report, 
developed by the TFDE, was subsequently endorsed by the G20 Leaders in November 2015 
and by more than 100 countries and jurisdictions participating in the Inclusive Framework on 
BEPS. 

The request for input covered the following topics: 
-Digitalisation, business models and value creation: the impact of digitalisation on business 
models, value creation, the role of intangibles and data collection and analysis. 
-Challenges and opportunities for tax systems: uncertainty and administrative burdens 
associated with the existing international tax framework, implications of highly digitalised 
business models and their value chain on taxation policy, including on existing tax bases and 
the distribution of taxing rights between countries. 
-Implementation of the BEPS package: the impact of BEPS measures implemented, including 
VAT, on BEPS risks and the broader tax challenges. 
-Options to address the broader direct tax policy challenges: assessment of the pros and cons 
of the options identified in the BEPS Action 1 report, including the tax nexus concept of 
significant economic presence, the withholding tax on certain types of digital transactions and 
the digital equalisation levy. 

The form of the request for input relied on open questions.  
The OECD publicly released all 53 written submissions received. The majority of the 
submissions were received from businesses/business associations, academics and law and 
consulting firms. 

In addition, the OECD organised a public consultation on 1 November 2017. 
The main views commonly expressed, at least within certain groups of stakeholders, can be 
summarised as follows: 

-  Many stakeholders across groups expressed the opinion that digital business models 
first need to be well understood before the tax consequences of digitalisation can be 
determined and any reform proposals can be made.  

-  Many businesses expressed the view that, before acting, it is appropriate to wait to see 

the full effects of the BEPS implementation. Especially given that public 
administrations are only beginning to learn about the ways in which businesses are 
responding to the BEPS package. 

-  Long term, comprehensive and multilateral solutions are preferred to short term 

measures, which risk creating distortions, undermine the existing international tax 
framework and are likely to lead to double taxation. 

-  The views expressed showed a lack of agreement concerning the most suitable long 
term solutions. This was confirmed during the consultation meeting held on 1 
November 2017. 

97 

 
 
 
 
 
 
ANNEX 3: WHO IS AFFECTED AND HOW? 

The objective of this annex is to set out the practical implications of the initiative for different 
types of companies and for national tax administrations.  

The  initiatives  directly  affect  companies  falling  under  the  scope  of  the  comprehensive 
solution or of the interim solution in absence of the former. 

I. Overview of Benefits (total for all provisions) – Preferred Comprehensive Option 

Description 

Amount 

Comments 

Level the playing 
field 

Fair distribution 
between national 
administrations  

Sustainable public 
finances 

Improve the 
perception of 
fairness 

Direct benefits 

++ 

+ 

+ 

Indirect benefits 

+ 

Businesses would benefit from a 
more level playing field as the 
revision of the rules would remove 
distortions of competition and fight 
aggressive tax planning. 

Correcting the existing misalignment 
of taxation and value creation would 
contribute to a fairer distribution of 
tax revenues between national tax 
administrations. 

National tax administrations would 
benefit from a positive impact on 
public finances as the solution will 
contribute to the long-run 
sustainability of the corporate tax 
system.  

The solution would improve the 
perception of fairness for citizens by 
ensuring that large companies with 
significant digital activities do not 
escape their taxes in the EU. 

II. Overview of Benefits (total for all provisions) – Preferred Interim Option 
Comments 

Amount 

Description 

Preserve the 
integrity of the 
single market  

Improve public 
finances 

Direct benefits 

+ 

+ 

98 

By avoiding the fragmentation of the 
single market, it will provide a stable 
tax  framework  for  businesses  active 
in the EU.  

It  will  be  an  additional  source  of 
tax 
revenues 

national 

to 

 
 
 
 
Improve the 
perception of 
fairness 

Indirect benefits 

+ 

administrations, 
revenues 
are 
moderate.  

although  overall 
to  be 
expected 

citizens 

fairness 

This  would  improve  the  perception 
of 
and 
for 
consumers  by  ensuring  a  minimum 
level  of  taxation  in  the  EU  for 
companies that rely the most on user 
contributions and data.  

III. Overview of costs – Preferred options 

Consumers  

Businesses 

Administrations 

One-off 

Recurrent 

One-off 

Recurrent 

One-off  Recurrent 

n/a 

n/a 

Direct 
costs 

Comprehe
nsive 
solution    

Indirect 
costs 

n/a 

n/a 

n/a 

n/a 

Interim 
solution   

Direct 
costs 

Costs for IT 
maintenanc
e and staff 
training.  

Increase in 
the 
regulatory 
and 
compliance 
burden for 
businesses 
falling under 
the scope of 
the solution. 

Costs for 
implemen
ting the 
new 
system, 
notably on 
IT. 

Costs for 
negotiatin
g double 
tax 
treaties. 

Increase in 
the 
regulatory 
and 
compliance 
burden for 
businesses 
falling under 
the scope of 
the solution 
to set up 
reporting for 
new 
permanent 
establishmen
ts 

n/a 

n/a 

n/a 

n/a 

Costs for IT 
maintenanc
e and staff 
training. 

Costs for 
implemen
ting the 
new 
system, 
notably on 
IT. 

Large 
companies 
above the 
thresholds 
would face 
one-off cost 
to adapt to 
the reporting 
requirements 
in the 
Member 
States in 

Large 
companies 
above the 
thresholds 
would have 
to pay the 
tax. 
Reporting 
requirements 
to compute 
the tax base 
in the 

99 

 
 
 
 
 
which they 
are active. 

No costs for 
SMEs 

Member 
States in 
which large 
companies 
are active. 

No costs for 
SMEs 

n/a 

n/a 

n/a 

n/a 

Indirect 
costs 

Possible 
increase in 
prices if 
companies 
pass on the 
cost of the 
tax, 
although this 
should be 
limited. 

National 
tax 
administrati
ons  may 
to 
wish 
invest 
in 
additional 
resources to 
prevent 
under-
reporting. 
In 
principle, 
self-
the 
declaration 
system 
would  limit 
these 
additional 
costs.  

Comprehensive solution 

All  business  sizes  would  be  affected  by  the  tax  as  there  would  no  group  size  threshold 
proposed for this Directive. It could therefore also cover smaller businesses that have a large 
digital footprint in one or more Member States.  

In  a  first  step,  all  companies  active  in  the  EU  and  running  digital  activities  would  have  to 
determine whether they fall under the application, depending on the level of digital activities 
falling under the scope of the comprehensive solution, the number of active users and/or the 
number of online contracts. This would require some additional burden e.g. to split revenues 
issued from the relevant digital activities with revenues from other activities, to identify and 
report the number of active users of the digital service in a Member State in a tax year and/or 
the number of online contracts. Businesses falling under the scope of the solution will face an 
increase  in  the  regulatory  and  compliance  burden  to  set  up  reporting  for  new  permanent 
establishments (one-off costs).  

Large companies would be affected by the comprehensive solution. Recurrent reporting and 
compliance  requirements  would  generate  extra  costs  for  large  companies.  However,  it  is 

100 

 
 
 
 
 
 
likely that large companies operating across borders have internal resources to cope with the 
additional administrative requirement.  

Small and medium sized enterprises may be affected by the comprehensive solution as they 
are  not  de  facto  excluded  from  the  scope.  However,  the  criteria  set  to  trigger  a  digital 
permanent establishment would limit the effective application of the tax to larger companies 
that  have  significant  digital  activities.  Determining  whether  they  fall  under  the  scope  of  the 
tax  may  be  quite  burdensome  as  young,  seed  enterprises  and  start-ups  may  not  have  the 
internal resources already in place to cope with the administrative obligations. However, the 
criteria to determine whether a company falls under the scope of application (i.e. triggering of 
a  digital  permanent  establishment  are  based  on  observable  indicators  and  available 
information (contracts, IP addresses etc.) which should limit the additional burden.  

National  tax  administrations  would  also  incur  costs  for  implementing  the  new  system, 
notably  on  IT  and  staff  training  to  be  able  to  apply  the  new    permanent  establishment  and 
profit  allocation  rules  to  reflect  the  digital  activities  in  that  Member  State.  The 
implementation  of  the  CCCTB  should  already  provide  a  solid  framework  for  the  tax 
administration  on  which  to  rely  on.  There  will  also  be  a  need  to  coordinate  in  the  EU  the 
uniform implementation and practical application of the new rules.  

National tax administrations may also face additional costs for negotiating double tax treaties. 

Interim solution 

In a first step, all companies active in the EU and conducting digital activities would have to 
determine whether they fall under the application, depending on the threshold on consolidated 
revenue  and  the  EU  threshold  on  digital  activities  falling  under  the  scope  of  the  interim 
solution. 

The fairly high revenue threshold envisaged under the preferred option would imply that only 
a small share of groups would be subject to application. By means of example, for a threshold 
of  EUR  750  million  the  application  may  be  compulsory  for  an  estimated  1.6%  of  company 
groups.  Considering  that  the  digital  economy  currently  constitutes  about  5%  of  the  total 
economy and that the EU threshold on relevant digital activities would also apply, the share of 
affected company groups would be significantly reduced.   

In  the  case of  a  self-assessment  system,  it  is  expected  that  the  persons  liable  to  pay  the  tax 
would submit a tax return on a regular basis, for instance following every month or quarter of 
taxable activities. In general, in the digital economy, transactions are mostly carried out online 
so the taxpayers accounting systems can calculate automatically the amount of tax that is due, 
thus contributing to lowering the compliance costs. One could also look into the potential for 
market-based solutions and synergies to assist compliance, such as IT software provision and 
database solutions. 

Large  companies  above  both  the  global  turnover  threshold  and  the  threshold  on  digital 
activities would face additional reporting requirement to compute the tax base in the Member 
States in which they are active, i.e. notably adapting the financial reporting to split revenues 
issued  from  the  relevant  digital  activities  with  revenues  from  other  activities  and  allocating 
internally revenues to various proxies such as number of active users, IP addresses. Possibly, 
the  general  ledger  of  accounting  would  need  to  be  adapted  to  include  more  granularities. 
However,  the  additional  information  may  not  necessarily  require  additional  assurance 

101 

 
processes/auditing  requirements  as  annual  reports,  signed  by  statutory  auditors,  already 
disclose financial information split by geographical location and activities. 

Small and medium sized enterprises will not be impacted given the existence of the global 
threshold. They will not face additional compliance burden in relation to the application of the 
new tax.  

National  tax  administrations  would  also  incur  costs  for  implementing  the  new  system, 
notably  on  IT  and  staff  training.  The  self-declaration  system  would  in  principle  limit  the 
additional  costs.    However,  national  tax  administrations  may  have  to  invest  on  additional 
resources  (human  and  tools)  to  prevent  under-reporting.  There  will  also  be  a  need  to 
coordinate in the EU the uniform implementation and practical application of the new rules, 
notably in the view of limiting possible disputes.  

The  application  of  the  new  tax  should  generate  additional  tax  revenues  for  national  tax 
administrations.  

Consumer  prices  are  likely  to  increase  following  the  implementation  of  the  new  tax.  The 
extent  to  which  the  tax  will  be  shifted  into  final  consumer  prices  depends  of  the  price 
elasticity  of  the  demand.  A  pass-on  rate  of  one-half  has  been  documented  for  paper-based 
books  and  e-books83.  However,  evidence  from  online  retail  where  consumers  purchasing 
online are price sensitive and react strongly to price increases, let suggest that the possibility 
for companies to pass additional tax onto consumer prices will be limited. 

83 See European Commission (2012) – Economic Study on Publications on all Physical Means of Support and 
Electronic Publications in the context of VAT, p. 98 
(https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/economic_study_vat_on_publications_final
report.pdf). The pass-on rates vary also country-wise – op. cit., pp. 95-96. 

102 

 
 
 
 
 
 
 
 
 
 
 
 
                                                 
 
Table 1: Compliance time and cost for setting up a new subsidiary (Large parent) 

Large Parent 

Current regime 

CCTB  

CCCTB 

Time 

Cost 

Time  % Diff. 

Cost 

% Diff. 

Time 

% Diff. 

Cost 

% Diff. 

Record keeping for corporate tax purposes 

5 261 

3 740.60 

3 063 

-41.79% 

2 992.46 

-20.00% 

3 592 

-31.73% 

5 708.94 

52.62% 

Transfer pricing documentation 

22 255 

36 165.74  22 162 

-0.42% 

36 143.08 

-0.06% 

0 

-100.00% 

0.00 

-100.00% 

Preparation of corporate tax computations 

4 049 

2 750.04 

1 976 

-51.19% 

2 190.86 

-20.33% 

4 256 

5.11% 

4 761.47 

73.14% 

Prepayments for corporate tax 

907 

965.56 

771 

-14.99% 

793.10 

-17.86% 

2 450 

170.18% 

2 662.13 

175.71% 

Corporate tax returns and payments 

1 080 

1 131.27 

987 

-8.58% 

1 005.12 

-11.15% 

3 085 

185.73% 

3 505.17 

209.84% 

Dealing with the tax authorities for corporate tax 

19 009 

37 365.70  16 616 

-12.59% 

35,038.00 

-6.23%  10 509 

-44.71%  30 200.90 

-19.17% 

Mutual agreement procedures on transfer pricing  

8 823 

17 618.47 

8 841 

0.20% 

17 677.73 

0.34% 

0 

-100.00% 

0.00 

-100.00% 

Clearances and rulings for corporate tax 

14 430 

34 912.77  14 541 

0.77% 

34,928.95 

0.05% 

1 288 

-91.08% 

3 996.90 

-88.55% 

Learning and education for corporate tax 

10 000 

5 220.08 

8 264 

-17.37% 

5 388.20 

3.22% 

1 469 

-85.31% 

2 104.33 

-59.69% 

Any other cross-border corporate tax compliance formality 

1 548 

733.76 

1 548 

0.00% 

733.02 

-0.10% 

0 

-100.00% 

0.00 

-100.00% 

Total estimated time spent/cost 

87 362  140 603.97  78 768 

-9.84%  136 890.52 

-2.64%  26 649 

-69.50%  52 939.85 

-62.35% 

Total estimated cost (% turnover) 

0.23% 

0.22% 

0.09% 

103 

 
 
  
  
  
  
  
  
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 2: Compliance time and cost for setting up a new subsidiary (Medium-sized parent)  

Medium-sized Parent 

Current regime 

CCTB  

CCCTB  

Time 

Cost 

Time 

% Diff. 

Cost 

% Diff. 

Time 

% Diff. 

Cost 

% Diff. 

Record keeping for corporate tax purposes 

5 147 

3 653.23 

3 034 

-41.05% 

2 957.01 

-19.06% 

3 178 

-38.26% 

4 490.57 

22.92% 

Transfer pricing documentation 

19 962 

30 192.40 

19 337 

-3.13% 

30 625.38 

1.43% 

0 

-100.00% 

0.00 

-100.00% 

Preparation of corporate tax computations 

4 023 

2 253.53 

1 954 

-51.42% 

1 778.82 

-21.07% 

3 301 

-17.94% 

2 862.65 

27.03% 

Prepayments for corporate tax 

896 

636.81 

760 

-15.20% 

524.54 

-17.63% 

1 880 

109.73% 

1 497.66 

135.18% 

Corporate tax returns and payments 

1 075 

871.48 

987 

-8.15% 

790.31 

-9.31% 

2 433 

126.34% 

2 427.03 

178.50% 

Dealing with the tax authorities for corporate 
tax 

Mutual agreement procedures on transfer 
pricing  

18 686 

32 968.18 

16 347 

-12.51% 

30 604.60 

-7.17% 

10 675 

-42.87% 

24 889.54 

-24.50% 

8 609 

17 076.44 

8 434 

-2.03% 

17 115.31 

0.23% 

0 

-100.00% 

0.00 

-100.00% 

Clearances and rulings for corporate tax 

13 893 

34 175.02 

14 083 

1.37% 

34 188.34 

0.04% 

1 266 

-90.89% 

3 958.48 

-88.42% 

Learning and education for corporate tax 

9 997 

5 201.14 

8 422 

-15.75% 

5 579.09 

7.27% 

1 450 

-85.49% 

2 064.35 

-60.31% 

Any other cross-border corporate tax 
compliance formality 

1 459 

677.86 

1 395 

-4.42% 

674.05 

-0.56% 

0 

-100.00% 

0.00 

-100.00% 

Total estimated time spent/cost 

83 747 

127 706.09 

74 754 

-10.74% 

124 837.45 

-2.25% 

24 184 

-71.12% 

42 190.28 

-66.96% 

Total estimated cost (% turnover) 

0.55% 

0.54% 

0.18% 

Source for Tables 1 and 2: Impact assessment accompanying the CCCTB proposal (SWD(2016) 341) based on the Deloitte Tax Experts survey. 
Note:   Time in minutes. Costs in Euros. Average of all investment flows 

104 

 
 
 
 
  
  
  
  
  
  
  
ANNEX 4: ANALYTICAL METHODS 

CORTAX: A MODEL TO SIMULATE CORPORATE TAX POLICIES  

BRIEF DESCRIPTION OF THE MODEL 

The  CORTAX  model  is  a  computable  general  equilibrium  model  designed  to  evaluate  the 
effects  of  corporate  tax  reforms  in  28  EU  countries  capturing  the  optimal  behaviour  of  all 
agents in the economy. In the model, each country is assumed to have the same structure in 
terms of consumption, savings, production and public finances (though the data are country-
specific).  Countries  are  linked  to  each  other  via  international  trade  in  goods  markets, 
international goods markets and investment by multinationals. The model also includes Japan, 
USA and a tax haven. 

Firms  are  divided  into  three  categories:  multinationals  headquarters,  their  subsidiaries 
located  abroad  and  domestic  firms  that  only  produce  in  their  country  of  residence. 
Multinationals and domestic firms differ to the extent that the former optimise profits globally 
and are engaged in profit shifting activities across borders. Domestic firms pay their corporate 
taxes in their country of residence according to the revenues generated in this country only. 
Both domestic and multinational firms shift profits to tax haven to reduce their tax burden. In 
the benchmark, all firms are equal and, whilst on aggregate taxable profits are positive, there 
are  random  shocks  affecting  their  revenues  that  can  be  attributed  to,  for  example,  business 
cycle evolutions. These shocks may result in losses that can be carried forward in the model.  

In relation to government, there is a balanced budget where consumption and public debt 
are a fixed proportion of GDP. Tax revenues and/or transfer payments adjust to keep constant 
public  budget.  The  taxes  included  in  CORTAX  are  consumption  taxes  and  direct  taxes  on 
income  from  corporate  and  labour,  dividends,  capital  gains  and  interest.  Government 
consumption and government debt as a share of GDP are maintained constant after a reform. 

The  effects  of  reforms  can  be  expressed  as  changes  in  GDP,  household  consumption, 
business  investment  and  fiscal  revenue.  The  model  is  elaborated  using  data  from  different 
data sources including Eurostat, the OECD, the United Nations, the IMF and the Orbis firm 
database (see section 4.2 below for more details). In the present exercise, the model has been 
constructed with a database for the year 2012. The structural description of the model and the 
calibration process borrow heavily from Bettendorf et al. (2009b).  

MODEL VALIDATION AND PEER REVIEW 

The CORTAX model has acquired a strong reputation among corporate tax experts. As noted, 
the model was originally produced by CPB Netherlands, and has since been used by experts 
affiliated  to  the  Oxford  University  Centre  for  Business  Taxation,  the  Erasmus  University 
Rotterdam, the Tinbergen Institute and CESifo. The model was previously used in an Impact 
Assessment  (European  Commission,  2011),  which  drew  extensively  from  a  report produced 

105 

 
 
 
 
 
for DG TAXUD (Bettendorf et al., 2009b). Among other policies, the report analysed both a 
common corporate tax base and a common consolidated corporate tax base for the EU.  

The CORTAX model has been the basis for a number of publications in peer-reviewed 
journals. Of particular note is Bettendorf et al. (2010a) in Economic Policy which simulates a 
common consolidated corporate tax base (CCCTB) across the EU, with further innovations of 
the  ideas  subsequently  published  in  Fiscal  Studies  (Bettendorf  et  al.,  2010b).  The  issue  of 
using  CORTAX  to  analysis  debt  bias  in  corporate  taxation  was  addressed  in  de  Mooij  and 
Devereux (2011) published in International Tax and Public Finance. An earlier publication in 
The World Economy used CORTAX to analyse the impact of corporate taxation on the labour 
market  (Bettendorf  et  al.,  2009a).  That  the  model  has  stood  up  to  the  rigorous  standards 
required  to  be  accepted  by  journals  of  this  quality  reflects  the  level  of  the  theoretical  and 
empirical  work  underlying  the  model,  and  that  it  is  appropriate  for  analysing  key  policy 
questions in the area of corporate taxation. 

DISCUSSION WITH EXTERNAL EXPERTS 

As noted in the previous section, the CORTAX model has been accepted within the corporate 
taxation community for some years. The model has been used by leading research institutes 
and universities, and work based around the model has been accepted for publication in high-
level, peer-reviewed academic journals in the area of fiscal policy. 

Since this earlier body of work, the model data has been updated by the Tax Modelling 
Group in JRC-Seville. This extensive recalibration process has been carried out in conjunction 
with external experts, as appropriate. The team has collaborated closely with Leon Bettendorf 
(CPB Netherlands), one of the original authors of the model, and lead author for many of the 
reports  and  journal  articles.  Regarding  the  calibration,  the  team  has  worked  with  Simon 
Loretz  (Institute  for  Advanced  Studies,  Vienna),  who  produced  much  of  the  data  for  the 
previous calibration of the model during his time at the Oxford University Centre for Business 
Taxation,  and  was  a  co-author  for  the  report  that  formed  the  basis  of  the  2011  Impact 
Assessment (European Commission, 2011).  

UNDERLYING ASSUMPTIONS AND DATA INPUT 

a)  Baseline and key assumptions 

In CORTAX, we account for two types of households: old and young. Their lifetime is 40-
year periods each and their behaviour remains the same during the whole period.  Households 
maximise their intra-temporal utility function subject to a budget constraint, where net savings 
from  young  workers  (wages,  current  transfers  and  negative  consumption)  are  equal  to 
negative value of net savings from old households. The effects on welfare are calculated using 
the compensating variation. This is calculated as the difference in transfers received by young 
households required to compensate the change in utility 

106 

 
 
 
 
 
 
Firms  maximise  their  value  subject  to  the  production  function  and  the  accumulation 
constraints  on  physical  capital  and  fiscal  depreciation.  Total  production  is  calculated  as  the 
sum  of  production  in  all  firms  (domestic  and  multinationals)  net  of  intermediate  inputs  in 
foreign subsidiaries. Usually, the production function is a Cobb Douglas combination of the 
fixed factor and the value added, which is a CES aggregate of labour and capital. The model 
allows  the  parent  company  to  charge  a  transfer  price  for  intra-firm  deliveries  that  deviates 
from the equivalent price that would be charged if it had been an inter-firm transaction (the 
‘arms-length’ price), which reflects profit shifting in multinationals. In the case of domestic 
firms,  these  practices  are  captures  with  the  existence  of  a  tax  haven.  Profit  shifting  to  tax 
havens depends on the difference between the statutory rate in their respective countries and 
the tax rate in the tax haven.  

b)  Key sources of macroeconomic and socio-economic data 

The  current  calibration  largely  uses  the  same  data  sources  as  the  original  calibration  of 
CORTAX  as  outlined  in  Bettendorf  and  van  der  Horst  (2006),  though  in  a  few  cases 
alternatives were used if these were considered more reliable, or the original source was no 
longer  available.  The  year  2012  data  was  chosen  as  reference  year  for  the  calibration,  as  it 
represented a good compromise between timeliness and completeness. The countries covered 
are the 28 EU member states, the United States and Japan.  

Population  and  employment  statistics  come  from  the  United  Nations  and  national 
accounts data on income and expenditure are collected from OECD and Eurostat. Purchasing 
power parity (PPPs) exchange rates are from the IMF and Eurostat and general government 
consolidated  gross  debt  as  a  percentage  of  GDP  is  from  DG  ECFIN’s  Ameco  Database. 
Additionally, CORTAX needs bilateral FDI positions as part of the calibration. For these, we 
start with the Eurostat bilateral positions. Data on Foreign Direct Investment (FDI) flows by 
country  of  origin  and  country  of  receipt  are  from  Eurostat  (financial  account,  direct 
investment,  reporting  economy,  database  table  bop_fdi_pos_r2).  As  a  number  of  countries 
have  incomplete  information  on  the  country  of  origin  of  the  inward  FDI  stock,  we  impute 
these values following the practice in Bettendorf and van der Horst (2006), and a correction is 
made when the FDI data represent special purpose entity activity.  

Finally,  CIT  receipts  as  a  percentage  of  GDP  are  from  European  and the  OECD  while 
information on balance sheets and ownership structure are extracted from the Orbis database, 
provided by Bureau Van Dijk. Although Orbis is a firm-level database, for the purposes of the 
calibration it is only used to produce national-level estimates of debt shares and of corporate 
investment shares (by type of asset) so as to calculate relevant corporate tax parameters such 
as the cost of capital (financed via equity or debt). 

c)  Construction of the baseline and core policy simulations   

The  data  described  above  is  entered  into  the  model,  which  provides  a  consistent  and 
connected framework for firms, household and governments. The data and the current policies 
of each country are used to replicate the corporate taxation regime, and indeed the production 
structure and household behaviour. The corporate taxation regime is necessarily stylised (for 

107 

 
 
 
 
 
example, not every deduction can be included), though we confirm that at a macro-level the 
CIT regimes are replicated well. 

The core simulations have been chosen to reflect the potential to build upon the policy 
options for harmonisation of corporate tax bases in the EU. Following the proposal (European 
Commission, 2015), the underlying reform considered is the common consolidated corporate 
tax  base  (CCCTB),  which  is  assumed  to  be  mandatory  for  multinationals  only  in  these 
simulations. The CCCTB proposal offers a holistic solution to  profit  shifting. It combines a 
common tax base together with consolidation of each multinational group's profit, removing 
the incentive to engage in profit shifting. Further details are available in Álvarez-Martínez et 
al. (2016).  

Building  on  this  basis,  the  CCCTB  formula  is  adjusted  to  account  for  the  digital 

presence, which is proxied using web page visits based on data from SimilarWeb. 

d)  Sensitivity of model results and likely robustness to changes in the 

underlying assumptions and/or data input 

Extensive sensitivity analysis has been conducted around the CCCTB policy simulations (see 
Álvarez-Martínez  et  al.,  2016).  These  simulations  provide  additional  insights  into  the 
consequences of altering the model assumptions or policy choices, and offer a strong test of 
the robustness of the results. The types of sensitivity analysis are as follows: (i) implementing 
the common corporate for all firms, rather than just multinationals, (ii) alternative definitions 
of  the  common  tax  base,  (iii)  stricter  control  on  profit  shifting,  (iv)  alternative  choices  for 
capital-labour  substitutability,  (v)  less  compliance  cost  saving  from  consolidation,  (vi) 
compensate  revenue  with  labour  taxes,  instead  of  changing  transfer  payments  and  (vii) 
discrete location choice for firms. 

Regarding  the  adjustments  to  the  CCCTB  formula  to  incorporate  digital  presence, 
various scenarios are presented. These indicate well the scale of the impact of such a policy, 
and the sensitivity of the results to the share of the formula determined by digital presence.  

108 

 
 
 
 
 
 
 
 
 
 
 
 
 
REFERENCES 

Álvarez-Martínez, María T., Salvador Barrios, Diego d'Andria, Maria Gesualdo, Dimitris 
Pontikakis and Jonathan Pycroft (2016), “Modelling corporate tax reform in the EU: New 
calibration and simulations with the CORTAX model,” Taxation Papers No. 66. European 
Commission. 

Bettendorf, Leon and Albert van der Horst (2006), “Documentation of CORTAX”, CPB 
Memorandum, No. 161, Netherlands Bureau for Economic Policy Analysis. 

Bettendorf, Leon, Albert van der Horst and Ruud A. de Mooij (2009a), "Corporate Tax Policy 
and  Unemployment  in  Europe:  An  Applied  General  Equilibrium  Analysis,"  The  World 
Economy, p.1319-1347.  

Bettendorf,  L.,  van  der  Horst,  A.,  de  Mooij,  R.,  Devereux,  M  and  Loretz,  S.  (2009b),  “The 
economic  effects  of  EU-reforms  in  corporate  income  systems”,  Study  for  the  European 
Commission  Directorate  General  for  Taxation  and  Customs  Union,  Contract  No. 
TAXUD/2007/DE/324, October. 

Bettendorf, Leon, Michael P. Devereux, Albert van der Horst, Simon Loretz and Ruud A. de 
Mooij (2010a), "Corporate tax harmonization in the EU," Economic Policy, July pp.537–590. 

Bettendorf, Leon, Albert van der Horst, Ruud A. de Mooij and Hendrik Vrijburg (2010b), 
"Corporate Tax Consolidation and Enhanced Cooperation in the European Union," Fiscal 
Studies, vol. 31, no. 4, pp. 453–479. 

De Mooij, R.A. and Devereux, M.P. (2011), "An applied analysis of ACE and CBIT reforms 
in the EU," International Tax and Public Finance, 18:1, 93-120. 

European  Commission  (2011),  Commission  Staff  Working  Document,  Impact  Assessment. 
Accompanying document to the Proposal for a Council Directive on a Common Consolidated 
Corporate Tax Base (CCCTB). COM(2011) 121 final. SEC(2011) 316 final. Brussels, March 
16. 

European Commission (2015), “A Fair and Efficient Corporate Tax System in the European 
Union: 5 Key Areas for Action”, Communication from the Commission to the European 
Parliament and The Council, COM(2015) 302 final. 

109 

 
 
 
 
 
 
 
ANNEX 5: SPECIFICITIES OF DIGITAL BUSINESS MODELS IN RELATION 
TO TAXATION 

i.  THE DIGITAL 'SECTOR' 

is  no  well-defined  digital  sector  as  such.  Notably, 

There 
the  Information  and 
Communication Technology (ICT) sector is no synonym for the digital economy. Rather, one 
might  consider  the  ICT  sector  as  the  backbone  of  the  digital  economy  (and  driving  the 
digitalisation  of  more  traditional  industries).  The  ICT  sector  comprises  both  manufacturing 
activities  and  services,  though  services  represent  more  than  90%  of  the  total  production. 
Computer  and 
followed  by 
Telecommunications.  ICT  services  are  also  growing  at  much  faster  rates  than  the  ICT 
manufacturing (European Commission, 2017b).  

largest  sub-sector, 

related  activities 

is  by 

the 

far 

Figure (1): Value added in the ICT sector in the EU-28 (2014) 

110 

 
 
 
 
 
 
Digital  companies  should  not  be  considered  pre-dominantly  as  ICT  companies.  Many 
companies  commonly  considered  as  digital  companies  do  not  actually  belong  to  the  ICT 
sector.  The  2017  World  Investment  Report  (UNCTAD,  2017a  and  2017b)  has  developed  a 
methodology  to  classify  international  companies  into  (1)  digital  companies,  (2)  IT  and 
telecoms companies (both enablers of the global digital economy) and (3) 'other multinational 
companies'.  IT  and  telecoms  companies  are  broadly  equivalent  to  the  ICT  sector.  They  are 
either IT hardware manufacturers or software developers/providers of IT services, or they are 
providers  of  telecommunication  infrastructure  and  connectivity.  Digital  companies  are 
characterised by the nature of their operations, which are strongly linked to the internet. The  
report  distinguishes  between  providers  of  internet  platforms,  e-commerce,  digital  solutions 
and digital content.  

Focussing on the top companies in each category clearly shows the much more dynamic 
revenue growth in the digital sector. Based on a unique assignment of companies into one 
of the categories, UNCTAD (2017b) has produced new lists of top 100 multinationals in the 
categories 'IT and telecoms' and 'digital'.84 Table (1) reports summary statistics for the largest 
companies  in  each  category.  Average  revenue  growth  was  around  14%  for  the  top  digital 
firms,  compared  to  around  3%  for  IT  and  telecom  enterprises  and  0.2%  for  other 
multinational  enterprises,  although  total  revenue  by  the  largest  digital  companies  is  still 
considerably  lower  than  that  of  the  other  sectors.  The  table  also  reports  the  'international 
footprint' and the relevance of intangible assets, discussed in the next subsection. 

Table (1): Revenue growth, international footprint and relevance of intangible assets of 
largest multinational companies 

Type of MNE  Total revenue 

Digital 
IT&Telecoms 
Other 

872 
2825 
5682 

Annual 
revenue 
growth 
14.2% 
3.1% 
0.2% 

International 
footprint 

Relevance of 
intangible assets 

2.1 
2.2 
1.1 

3.1 
1.2 
1.4 

Source: Own computations based on UNCTAD (2017a and 2017b) and  
Notes: Total revenue for the latest available year for the top companies in  each category in $ billion. 'Digital' 
and 'IT&Telecoms' each consist of 100 companies. The category 'Other' only includes 83 companies, since some 
of the companies on UNCTAD's usual list of top 100 global companies belong to the first two categories. Annual 
average growth is measured over the latest 7 available years. International footprint is the ratio of the share of 
foreign  sales  in  total  sales  to  the  share  of  foreign  assets  in  total  assets.  The  relevance  of  intangible  assets  is 
computed as the market capitalisation over equity book value minus 1. 

84  As  the  focus  in  UNCTAD  (2017b)  is  on  international  investment,  only  companies  which  exceed  a  certain 
threshold of international activity are considered. Furthermore, the companies need to report certain information 
in their publicly available financial accounts. 

111 

 
 
 
 
                                                 
ii. 

 SPECIFICITIES OF DIGITAL BUSINESS MODELS IN RELATION TO TAXATION 

The main characteristics of digital business models - as compared to more traditional ones - 
are their ability to conduct activities remotely, the contribution of internet users in their value 
creation and the importance of intangible assets. 

(a) Limited physical presence 

Businesses in the digital economy can easily conduct activity remotely and are therefore 
very active in cross-border trade. Little physical presence is required to sell into a market 
From one  click on the computer,  consumers can  order goods and services  from all  over the 
world, translating into new market reach.  For digital services more specifically, this is even 
more  acute  as  the  delivery  of  the  service  itself  requires  no  or  little  physical  presence. 
Digitalisation  also  changes  the  nature  of  exchange  by  blurring  the  lines  between  goods  and 
services,  transforming  products  to  their  digital  representation  such  as  e-books  or  using  the 
little material as in 3D printing. 

Digitalisation is profoundly changing the structure of businesses. Primary activities such 
as outbound logistics, marketing, sales and services that traditionally constitute an important 
part of the value chain/system (Porter, 1985) are going through a process of dematerialisation. 
Such  activities  were  mostly  conducted  locally  in  the  destination  location,  and  are  now 
conducted  remotely  in  the  country  of  origin  (at  source),  although  increasingly  relying  on 
consumer information from the destination country. One observes a disintermediation process 
– also referred as a  'scale without  mass'  business structure. The disintermediation  no longer 
allows the destination country to tax the profit generated from the sales/marketing activities, 
although the consumers/users in the destination country play an important role through their 
provision of data and other user contributions.  

As  a  result,  businesses  of  the  digital  economy  have  a  fundamentally  different 
international  footprint,  with  far  fewer  assets  in  the  location  of  their  foreign  sales.  One 
way  to  measure  this  phenomenon  is  by  measuring  the share  of  foreign  assets  in  total  assets 
against the share of foreign sales in total sales. 

International footprint = (foreign sales/total sales)/(foreign assets/total assets) 

Doing so for the three categories of largest global companies (see Table 1 above) shows that, 
compared to the traditional non-IT companies, digital companies, have a much larger share of 
sales  earned outside  their  home country  relative to  the assets they hold  abroad compared  to 
traditional  multinational  enterprises.  The  2017  World  Investment  Report  provides  a  more 
detailed  breakdown  which  helps  arriving  at  a  clearer  picture.  Figure  2  reports  ratios  for  the 
different  business  models  used  in  the  report.  The  international  footprint  is  particularly 
striking,  with  values  exceeding  2.0,  for  internet  platforms  (search,  social  networks  or  other 
platforms),  electronic  payment  companies  and  companies  classified  as  'other  e-commerce', 
which  includes  for  example  major  travel  platforms.  In  contrast,  telecom  companies, 
traditional businesses and online retailers, but also providers of digital media have overall a 
balanced ratio of around 1.  

112 

 
 
Figure (2): The internet intensity matrix and the foreign sales/assets ratio 

Source:  ©UNCTAD  2017  World  Investment  Report  (UNCTAD,  2017a),  based  on  UNCTAD’s  FDI/MNE 
database, company reports and data from Bureau van Dijk Orbis database and Thomson ONE.  

Most  of  these  remote  activities  by  large  global  companies  are  conducted  from  non-EU 
locations.  Only  50%  of  the  affiliates  of  digital  multinational  enterprises  are  foreign-based, 
indicating  the  reduced  need  to  be  physically  present  abroad  –  for  other  (traditional) 
multinationals the share is 80%.85 Large digital multinationals are particularly concentrated in 
the  United  States.  From  the  top  100  digital  multinational  enterprises,  two-thirds  had  their 
headquarters  in  the  United  States,  whereas  for  tech  companies  and  other  multinationals  the 
share was only 20%.86 

(b) Disruption in value creation and indirect revenue generation 

The relevance of user contributions is central, materialising through the mass of adopters, 
the  production  of  data  and  other  forms  of  user  contributions  to  the  production  process. 
Participating in a platform or a network creates a value. As opposed to the conventional 'value 
chain'  business  model  where  value  is  generated  by  the  supplier  of  a  product  or  a  service,  a 
large part of the value derived by users of an online platform's is created by other users. This 

85  In  this  comparison,  digital  multinationals  are  those  with  business  models  'digital  content',  'e-commerce', 
'digital solutions' and 'internet platforms' in the diagram in Figure (3). 
86 UNCTAD 2017 World Investment Report (UNCTAD, 2017a). 

113 

 
                                                 
is particularly true for multi-sided platforms. The effects that one user of a good or service has 
on  their  value  to  other  users  are  known  as  network  effects'87  (i.e.  the  marginal  benefit  of 
adopting the service increases with the number of users). 

Digital  platform  models  have  moved  from  the  traditional  linear  structure  (from 
production  to  after-sales  services),  to  the  development  of  an  ecosystem.  This  involves 
different skills, sources of power, strategic assets, market values and sources of growth (see 
Table 2). Instead of monitoring a value chain, digital platforms need to manage a community 
of  providers  and  users  to  increase  their  network.  In  other  words,  instead  of  maximising  the 
value  of  individual  consumers,  the  platforms  need  to  maximise  the  value  of  a  network  of 
transactions.88 This translates in an increase in the value of the company or service, exceeding 
the proportional increase in the number of users. 

Table (2): Differences in business models in the industrial and digital economies 

Focus 
Structure 
Source of 
Power 

Economic 
model 
Strategic 
assets 
Market 
value 
Source of 
growth 

Industrial Economy 
Product 
Value chain 
Monitoring and control 
of the value chain 

Economies of scale on 
the supply side 
Physical assets 

Return on assets 

Organic growth or 
acquisitions 

Digital Economy 
Platform 
Ecosystem 
Governance and 
architecture of the 
platform 
Economies of scale on 
the demand side 
Ecosystem capacity, 
platforms attractiveness 
Return on transactions 
within the ecosystem 
Network effects 

Source: Accenture (2016). 

The  concept  of  'prosumers'  is  emerging  where  the  end-user  participates  in  the  value 
creation.89  The  end-user  is  no  longer  solely  a  consumer  but  contributes,  either  actively  or 
passively,  to  the  value  creation.90  The  consumer  may  receive  services  for  free,  but  also 
provides data that are valuable for a company or contributes more actively to the service, for 
example by uploading content. This is a phenomenon that Colin (2013) associates to a form of 

87  See  Commission  Staff  Working  Document  on  Online  Platforms,  accompanying 
"Communication on Online Platforms and the Digital single market" (COM(2016) 288) 
88 https://estrategiaparatodos.wordpress.com/2017/01/08/the-digital-economy-and-network-effects-value-chains-
and-multilateral-platforms/ 
89 The term was first coined by futurist Alvin Toffler in his work Future Shock (1970) and later developed in its 
sequel, The Third Wave (1980). 
90 The extent to which digital business models disrupt the value chain varies quite significantly from one model 
to another. For example, network effects will be particularly relevant for business model acting as marketplace 
(two-sided platforms) or social media that connect users. Reliance on big data is very strong for social media, 
Internet search services and online advertising platforms while it is moderate for cloud services. 

the  document 

114 

 
 
 
                                                 
work without monetised compensation (obvious examples are Google or Facebook to which 
access is free but all activities, searches, interactions that reveal interests and preferences are 
recorded and can used to create value). Petruzzi and Buriak (2017) also refer to 'unconscious 
contributor' or 'unconscious employees'. This creates challenges in determining where and by 
whom, value is created. 

Often  digital  businesses  provide  certain  types  of  products  for  free  and  monetise  other 
products,  creating  a  disconnection  between  revenues  generated  and  services  provided. 
Revenue generation in the digital economy derives from both direct payments (subscription or 
transaction  fees)  and  indirect  payments  through  the  generation  of  value in  one activity (e.g. 
social media, search engines) that is later monetized as input for another activity (e.g. sales of 
advertising  space  or  transmission  of  data).  The  generation  of  income  via  advertisements 
arguably replicates the selling of advertisement space on television or radio. What does make 
a  difference,  however,  is  the  unique,  almost  personalised  manner  in  which  advertising 
placements  track  the  user  –  by  responding  directly  to  their  search-engine  searches  or  direct 
clicks on to adverts (Commission Expert Group on Taxation of the Digital Economy, 2014). 
Taken  together  the  disconnection  between  the  consumers  of  advertisements  and  the 
advertising  companies  and  the  fact  that  user  data  are  central  to  the  personalisation  of 
advertisements result in a particularly stark deviation from the principle of taxation where the 
value is created. 

(c) Importance of intangible assets 

One key feature of intangible assets is that they are difficult to value reliably, while they 
are the essence of a competitive advantage in some businesses. When generated internally, 
generally  accounting  principles  including  international  accounting  standards  prohibit  the 
recognition of those assets, even though they are a core component of a business model. As a 
consequence,  they  do  not  appear  on  a  company's  balance  sheet  until  such  assets  are  either 
acquired  or  otherwise  transferred  to  a  third  party  for  a  consideration  (e.g.  business 
combination), in which case the financial statements of the acquiring company must generally 
recognise these assets for its fair value.  

There  is  evidence  that  intangible  assets  are  particularly  important  for  companies  with 
significant  digital  activities.  Markets  tend  to  attribute  their  own  value  to  assets,  whether 
recognised or not. Therefore, as a proxy, differences in the importance intangible assets can 
be derived by comparing differences between a company's equity book value and its market 
valuation (UNCTAD, 2017a).  The increasing importance of intangible assets is shown by a 
widening gap between book and market values of companies. Undisclosed intangibles of the 
largest  digital  multinationals  are  estimated  to  be  on  average  roughly  equal  to  3  times  the 
company's  total  equity  book  value  –  significantly  more  than  the  average  recorded  for  IT  & 
telecom companies and other multinational enterprises (see Table 3 below). At the same time, 
the excess in market capitalisation over equity book values are of course also an indication of 
the market expectations about future revenue generation.  

115 

 
 
 
Table (3): Overview of physical presence per sector (digital, ICT and other) 

International footprint 
2.1 
2.2 
1.1 

Digital 
IT & Telecoms 
Other 
Source:  Based  on  data  from  the  Buerau  van  Dijk  Orbis  database.  Notes:  The  relevance  of  intangibles  is 
computed as the market capitalisation over equity book value minus 1. 

Relevance of IP 
3.1 
1.2 
1.4 

The  differences  in  asset  profiles  indicate  a  structural  shift  in  the  sources  of  value 
creation,  from  physical  assets  to  intangibles.  It  also  illustrates  the  profound  disruption 
brought  about  by  digital  multinationals  discussed  above.  The  intangible  investment  offers  a 
high  competitive  advantage.  At  the  same  time  it  raises  a  concern  over  a  growing  distance 
between highly productive firms at the frontier and the followers. Chen et al. (2016) find that 
intangible capital is significantly more productive in ICT-intensive sectors than in those that 
use little ICT. 

(d) Winner takes most dynamics 

Digital markets are often dominated by a few 'superstar' firms. Today's big players of the 
digital  economy  are  fairly  young  companies  that  have  created  new  markets  and  quickly 
become global, dominant players. Common characteristics include the volatility in the market 
(the rapid gaining and losing of market share), the tendency towards monopoly and oligopoly 
and the relevance of user contributions to the success of the business model (OECD, 2015a). 
Although  modern  technologies  such  as  the  internet,  software  and  cloud  services,  make  it 
possible to  enter  markets  at  minimal  costs  and  as  such  threaten  a  dominant  position  (Evans 
and Schmalensee, 2016), digitalisation and globalisation contribute to a trend of 'winner takes 
most'  markets  that  are  dominated  by  a  few  'superstar'  firms  (Veugelers,  2017).    For  digital 
markets  this  has  to  do  with  the  relevance  of  large  fixed  investments,  combined  with  low 
marginal costs (once developed digital goods can be reproduced at almost no cost), network 
and  lock-in  effects.91  These  are  strong  forces  bringing  about  increasingly  concentrated 
markets.  Capacity  limits,  product  differentiation  and  potential  for  multi-homing  (i.e.  the 
possibility  to  be  active  on  several  similar  platforms)  however  can  limit  the  level  of 
concentration (Haucap and Heimeshoff, 2014).  

91 See for example Shapiro and Varian (1998). Moreover, the literature on barriers to market entry recognizes 
the type of lock-in effects that networks can entail as a possible switching barrier, one form of a barrier to market 
entry. Similarly, low taxes, giving a cost advantage to the incumbent firm, are one form of a market barrier. A 
review of the literature on market barriers and a classification of different forms of barriers is provided in 
McAfee et al. (2003). 

116 

 
 
 
 
 
 
 
                                                 
 
Data  on  the  top  100  global  companies  by  market  capitalisation  shows  the  increasing 
dominance  of  ICT/digital-based  firms,  notably  US  firms  (see  figure  below).  Within  one 
decade,  only  three  companies  that  were  in  the  top-10  ranking  of  companies  by  market 
capitalisation  have  remained  in  this  position,  one  of  them  being  Microsoft,  a  technology-
based company closely associated to the digital revolution. In 2016, seven out of the top-10 
companies were associated to the ICT sector, with Apple, Alphabet and Microsoft leading the 
overall ranking.   

Figure 3: Top 100 global companies (1-15) by market capitalisation, 2017 and 2009 

117 

Figure I.2-A.8 Top 100 global companies (1-15) by market capitalisation, 2017 and 2009 CompanyIndustryCountry31 March, 201731 March, 2009Change in rankRankMarketRankMarketbetweenCapitalisationCapitalisation31 March, 2009($bn)($bn)and31 March, 2017Apple IncTechnologyUnited States17543394+32Alphabet Inc-Cl ATechnologyUnited States257922110+20Microsoft CorpTechnologyUnited States35096163+3Amazon.Com IncConsumer ServicesUnited States4423na31-Berkshire Hathaway Inc-Cl AFinancialsUnited States541112134+7Facebook Inc-ATechnologyUnited States6411---Exxon Mobil CorpOil & GasUnited States73401337-6Johnson & JohnsonHealth CareUnited States833881450Jpmorgan Chase & CoFinancialsUnited States931428100+19Wells Fargo & CoFinancialsUnited States102795560+45Tencent Holdings LtdTechnologyChina11272-13-Alibaba Group Holding-Sp AdrConsumer ServicesChina12269---General Electric CoIndustrialsUnited States1326024107+11Samsung Electronics Co LtdConsumer GoodsSouth Korea142595361+39At&T IncTelecommunicationsUnited States152567149-8Source: Bloomberg and PwC analysisScience, Research and Innovation performance of the EU 2018 
 
 
 
 
  
       
ANNEX 6: DETAILED BASELINE SCENARIO ON RELEVANT POLICY 
INITIATIVES 

OECD work in progress: 

Progress within the Base Erosion and Profit Shifting project 

The BEPS Action 1 report (OECD, 2015a) concluded that digitalisation did not present 
specific issues in the area of tax avoidance but could exacerbate some. This is the reason 
why  several  of  the  BEPS  actions  refer  explicitly  to  the  challenges  posed  by  digitalisation. 
Four of these actions have led to an agreed minimum standard. The rest of the actions have 
led  to  recommendations  and  guidance.  The  Inclusive  Framework  of  BEPS  brings  together 
more than 100 jurisdictions, thereby allowing for a widespread implementation of the BEPS 
measures.  

Minimum  standards  were  agreed  with  respect  to  Action  5  (Harmful  Tax  Practices), 
Action  6  (Treaty  abuse),  Action  13  (Transfer  Pricing  Documentation)  and  Action  14 
(Dispute  Resolution  Mechanisms).  Several  of  the  Anti-Base  Erosion  and  Profit  Shifting 
(BEPS) actions refer explicitly to the challenges posed by digitalisation. Four of these actions 
have led to agreed minimum standards in the areas of harmful tax practices (Action 5), treaty 
abuse  (Action  6),  transfer  pricing  documentation  (Action  13)  and  dispute  resolution 
mechanisms (Action 14). Minimum standards are subject to a peer-review that will take place 
in  2016-2020  and  should  ensure  consistent  implementation.  In  the  light  of  the  challenges 
brought by digitalisation, Actions 5, 6 and 13 are particularly relevant. Other actions are in the 
form of recommendations and guidance. The Inclusive Framework of the BEPS Project brings 
together more than 100 jurisdictions, thereby allowing for a widespread implementation of the 
BEPS measures. 

The implementation of Action 5 is well under way. The overwhelming majority of existing 
intellectual  property  regimes  were  abolished  or  amended  in  line  with  the  "nexus approach", 
both at EU and at global level (through the Inclusive Framework). Similarly, a high number of 
rulings  have  been  exchanged  among  member  of  the  Inclusive  Framework.  In  the  EU,  the 
amendment  to  the  Directive  on  the  automatic  exchange  of  information92  has  made  the 
exchange of rulings legally binding.  

Measures to prevent treaty abuse start to be widely implemented. Around 70 jurisdictions 
signed  the  Multilateral  Convention  to  Implement  Tax  Treaty  Related  Measures  to  Prevent 
BEPS (MLI), whereby about a third of existing tax treaties will be aligned with the minimum 
standard  on  action  6.    Countries  may  also  update  their  bilateral  tax  treaties  though  bilateral 

92 Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory 
automatic exchange of information in the field of taxation (OJ L 359, 16.12.2014) 

118 

 
 
 
                                                 
negotiations.  Finally,  the  Commission  issued  a  Recommendation  in  2016  on  Tax  Treaty 
issues,93 which advises Member States on how to reinforce their tax treaties in a way that is 
compliant  with  EU  law.  Treaty  abuse  is  relevant  given  the  increased  ability  to  choose  the 
location of resources (e.g. intellectual property) that are key to digital activities.  

The  exchange  of  country-by-country  reports  has  been  made  legally  binding94  on  EU 
Member States with the first exchanges planned in 2018. More than half of the Inclusive 
Framework  members  have  signed  an  agreement  to  operationalise  the  exchange  of  reports 
between jurisdictions. 

The amendments to the permanent establishment definition (Action 7) and revisions of 
the  Transfer  Pricing  Guidelines  (Actions  8-10),  which  are  not  subject  to  minimum 
standards, are very relevant to address the challenges of digitalisation. The amendments 
to  the  permanent  establishment  definition  have  been  the  subject  of  the  2016  Commission 
Recommendation  on  Tax  Treaty  issues,  which  is  non-legally  binding,  and  there  have  been 
several reserves in the context of the MLI. While the BEPS outcomes have been reflected into 
the OECD Transfer Pricing Guidelines, the effective implementation will largely depend on 
the national legislation. 

Amendments to the permanent establishment rules in the OECD Model Tax Convention 
were  agreed,  but  these  are  not  legally  binding  and  some  countries  have  made 
reservations  against  these.  Through  the  amendments,  the  regular  conclusion  through 
intermediaries of contracts to be performed by a foreign enterprise triggers a sufficient taxable 
nexus in that country.95 Moreover, specific activity exemptions would only apply to activities 
that are of a preparatory or auxiliary character, that is, only if the activities do not form part 
of the core business. For example, a large warehouse of an online sales business for storage 
and delivery of goods would constitute an essential part of the sales and distribution function 
of that business. As a result the warehousing function would not qualify for the preparatory 
and auxiliary activity exemption anymore. The proposed amendments are implemented either 
through bilateral tax treaty negotiations or through the so-called ‘Multilateral Instrument’, but 
some  countries  have  reserved  against  these.  At  EU  level,  the  2016  Commission 
Recommendation  on  the  implementation  of  measures  against  tax  treaty  abuse  encourages 
Member States to implement the proposed provisions.  

93 Commission Recommendation (EU) 2016/136 of 28 January 2016 on the implementation of measures against 
tax treaty abuse (OJ L 25, 2.2.2016) 
94 Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU as regards mandatory 
automatic exchange of information in the field of taxation (OJ L 146, 3.6.2016) 
95 "For example, where the sales force of a local subsidiary of an online seller of tangible products or an online 
provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective 
large  clients  for  those  products  or  services,  and  these  contracts  are  routinely  concluded  without  material 
modification  by  the  parent  company,  this  activity  would  result  in  a  permanent  establishment  for  the  parent 
company." (OECD, 2015b). 

119 

 
                                                 
Furthermore, the G20/OECD Base Erosion and Profit Shifting BEPS project96 examined 
a  new  nexus  in  the  form  of  a  significant  economic  presence  without  issuing  a 
recommendation. The economic presence would be assessed on the basis of various elements 
such as revenues, digital factors (local domain names, local digital platforms, local payment 
options)  and  users-based  factors  (such  as  number  of  'monthly  active  users',  online  contract 
conclusion  or  data  collected).  Although  the  report  did  not  include  this  new  nexus  in  its 
recommendation,  it  made  clear  that  the  evolution  of  the  digital  economy  warranted  further 
work on the issue and a monitoring of the developments. 

Legally-binding  rules  have  been  agreed  at  EU  level  regarding  CFC  rules  (Action  3), 
interest limitation rules (Action 4) and hybrid mismatches (Action 2), which should enter 
into force as from 201997 and 2020.98 However, according to the OECD assessment, there has 
not  been  great  interest from  countries  to  amend  the  CFC  rules  with  respect  to  income  from 
online sales and services.  Beyond the EU Member States, a number of other countries have 
or will have elements of those rules in their national legislation. 

The  OECD  is  continuing  its  work  on  digital  taxation  and  has  recently  published  its 
interim  report  on  the  taxation  of  the  digital  economy  and  presented  it  to  the  G20 
Finance  Ministers  at  their  meeting  in  March  2018  (OECD,  2018).  In  the  long-term,  the 
OECD  will  also  examine  reforms  related  to  the  nexus  and  the  profit  allocation  (permanent 
establishment  and  transfer  pricing),  the  two  pillars  of  the  problem.  A  final  report  is  due  in 
2020. 

EU work in progress 

Corporate taxation 

At  EU  level,  the  Commission  has  launched  a  new  proposal  for  the  CCCTB.  The  baseline 
scenario  assumes  that  the  current  CCCTB  proposal  will  be  introduced.  The  box  below 
explains the key relevant provisions of the CCCTB proposal. 

The  Anti-Tax  Avoidance  Directive  puts  forward  tax  rules  aimed  at  preventing  that  income 
goes untaxed (or taxed at very low level), inter alia through controlled foreign company rules, 
exit taxation and switch-over rules. It will enter into force in January 2019 (with exceptions). 

96 Final report on Action 1. 
9797 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that 
directly  affect  the  functioning  of  the  internal  market  (OJ  L  193  of  19.7.2016).  The  following  derogation  is 
foreseen "Member States which have national targeted rules for preventing BEPS risks at 8 August 2016, which 
are equally effective to the interest limitation rule set out in this Directive, may apply these targeted rules until 
the  end  of  the  first  full  fiscal  year  following  the  date  of  publication  of  the  agreement  between  the  OECD 
members on the official website on a minimum standard with regard to BEPS Action 4, but at the latest until 1 
January 2024." 
98 Council Directive (EU) 2017/952 of amending Directive (EU) 2016/1164 as regards hybrid mismatches with 
third countries 

120 

 
                                                 
As  stated  in  the  June  2015  Action  Plan99,  the  Commission  is  working  on  improving  the 
transfer  pricing  framework  in  the  EU.  For  example,  a  report  addressing  the  challenges  of 
valuing intangibles by using economic valuation methods will be published soon by the EU 
Joint Transfer Pricing Forum, an expert group advising the Commission on TP matters.  

To prevent the harmfulness of these schemes, an agreement was reached in the OECD and in 
the  EU  on  the  approach  to  be  taken  to  ensure  that  there  is  a  clear  link  between  the  tax 
advantage  being  granted  under  the  patent  box  and  a  firm’s  R&D  activities  ('nexus 
approach').100 The EU agreement on a modified nexus approach requires that Member States 
with patent boxes that do not meet this condition close them to new entrants by 30 June 2016 
and abolish them by the 30 June 2021. 

Box: CCCTB rules on tax residence and allocation of profits 

The CCCTB applies to companies that are established under the laws of a Member State, 
including  their  permanent  establishments  in  other  Member  States.  It  also  applies  to 
companies  established  under  the  laws  of  a  third  country  in  respect  of  their  permanent 
establishments situated in one or more Member States.  

Permanent establishment rules 
A  permanent  establishment  is  a  fixed  place  of  business  such  as  a  branch,  an  office,  a 
factory, a place of management, or a construction site if it lasts more than a year. Certain 
activities  of  preparatory  or  auxiliary  nature  may  be  excluded  from  the  definition  of  a 
permanent establishment, most notably if facilities are used solely for storage, display or 
delivery of goods, or carrying out for the taxpayer, purchasing activities or collecting of 
information. Under certain circumstances, a permanent establishment is deemed to exist 
where  a  person  on  behalf  of  a  taxpayer  habitually  concludes  contracts  or  plays  the 
principal role leading to a conclusion without material modification.101 

Resident and non-resident taxpayer 
A company that is a tax resident in a Member State is a resident taxpayer for the purposes 
of the CCCTB. Normally, this is the case if such a company is incorporated or centrally 
managed in a Member State. A resident taxpayer is in principle subject to tax on all of its 
worldwide  income;  that  is  irrespective  of  whether  or  not  it  originates  from  within  the 
Member State of residence. A company that is not resident in a Member State is a non-
resident taxpayer if that company has a permanent establishment in a Member State. A 
non-resident  taxpayer  of  a  Member  State  is  subject  to  tax  only  on  income  that  can  be 
attributed to its permanent establishment in said Member State.102 

99 COM(2015) 302 final 
100 This does not mean that these schemes are effective in raising R&D efforts. 
101 Article 5 of the Directive on a Common Corporate Tax Base. 
102 Under the rules of the common corporate tax base, that is before consolidation and apportionment is applied, 
the implications of being a resident and non-resident taxpayer are determined by the bilateral double tax treaties 
between Member States. In essence, they are also based on the principle that resident taxpayers are taxed on their 
worldwide income whereas non-resident taxpayers are taxed only on their domestic income. These treaties also 
lay down how to avoid double taxation of the same income. Under a territorial approach the taxpayer (whether 
resident or non-resident) is subject to tax only on income earned in that territory. 

121 

 
 
 
 
                                                 
Mandatory scope 
Only large companies fall under the mandatory scope of the CCCTB. This is the case for 
a company belonging to a consolidated group for financial accounting purposes with total 
consolidated  group  revenue  that  exceeded  EUR  750  million  during  the  financial  year 
preceding the relevant financial year. All other companies can opt to apply the CCCTB. 

Allocation of tax base 
Under the CCCTB all profits within a group are added and then apportioned back to the 
entities of the group through a formula. The formula puts equal weight on three factors: 
two input factors, assets and labour, and a factor capturing the market side, namely sales. 
Assets  exclude  intangible  assets  and  financial  assets  to  make  the  formula  more  robust 
against aggressive tax planning, considering their highly mobile nature. The labour factor 
consists of two sub-factors, each with equal weight, which are number of employees and 
payroll.  The  sales  factor  consists  of  sales  by  destination,  that  is,  a  sale  of  a  group  is 
attributed  to  an  entity  depending  on  the  location  of  the  customer  (where  transport  or 
dispatch ends). Where there is no group member in the Member State of destination, the 
sales are included in the sales factor of all group members in proportion to their labour 
and asset factors. Similarly, where there is more than one group member in the Member 
State  of  destination,  the  sales  are  included  in  the  sales  factor  of  all  group  members 
located in that Member State in proportion to their labour and asset factors.  For certain 
industries, there are adjusted formulae that better fit the needs of sectors such as financial 
services and insurance, oil and gas as well as shipping and air transport. 

Value added tax 

The implementation of the destination principle started with new VAT place of supply rules 
for  B2C  telecommunications,  broadcasting  and  electronically  (TBE)  supplied  services103, 
which  came  into  force  in  2015.  According  to  such  rules,  VAT  is  due  in  the  Member  State 
where the consumer is  established. A simplification mechanism is provided  – the Mini One 
Stop Shop (MOSS) – allowing businesses to make a single declaration and payment in their 
own  Member  State  in  respect  of  sales  in  other  Member  States.  Other  complementary 
legislative  proposals,  which  further  implement  the  destination  principle  in  VAT,  have  also 
been recently adopted. Notably: (i) the e-Commerce proposal, adopted in December 2017, (ii) 
the proposal on a definitive VAT system for intra-EU cross-border trade, adopted in October 
2017,  and  (iii)  the  new  proposal  on  rates  of  January  2018  which  is  intended  to  give  more 
freedom for Member States to set VAT rates. 

103 For more information on the 2015 rules, see here. Council Implementing Regulation (EU) No 1042/2013 of 
7 October 2013 amending Implementing Regulation (EU) No 282/2011 as regards the place of supply of services 
(OJ  L  284,  26.10.2013,  p.  1);  and  Council  Regulation  (EU)  No 967/2012  of  9 October  2012  amending 
Implementing Regulation (EU) No 282/2011 as regards the special schemes for non-established taxable persons 
supplying telecommunications services, broadcasting services or electronic services to non-taxable persons (OJ 
L 290, 20.10.2012, p. 1).  

122 

 
 
 
 
 
                                                 
According to the e-commerce proposal, all cross-border B2C supplies of services, as well as 
imports, will be taxed in the Member State of the consumer. This would replace the current 
regime,  where  B2C  supplies  of  services  other  than  TBE  are  generally  taxed  in  the  Member 
State  where  the  supplier  is  established.  The  current  exemption  for  the  importation  of  small 
consignments,  according  to  which  non-EU  suppliers  can  supply  VAT-free  goods  to 
consumers in the EU, will be abolished.   

According  to  the  proposal  on  a  definitive  VAT  system,  the  current  VAT  arrangements  for 
B2B  cross-border  supply  of  goods  will  also  be  changed.  At  present,  a  B2B  cross-border 
supply of goods within the EU is split into two different transactions for VAT purposes: 1) an 
intra-EU supply of goods exempt in the Member State of origin (made by the supplier); 2) an 
intra-EU  acquisition  of  goods  taxed  in  the  Member  State  of  destination  (made  by  the 
customer). With the new rules, the exemption for the B2B cross-border supply of goods will 
disappear and businesses making such supplies will be liable for declaring and paying VAT in 
the Member State of arrival of the goods by means of an extended One Stop Shop (OSS). 

MS work in progress: 

Some MS have introduced national measures to address the taxation of the digital economy, 
e.g. Hungary (online advertising tax), Germany and France (access to online digital content) 
or  Slovakia (on  revenues derived by intermediation  through websites and online platforms), 
while the others specifically targeted the profit-shifting issue in the form of a diverted profits 
tax  and  withholding  tax  (UK)  and  a  new  administrative  procedure  for  large  non-resident 
MNEs to disclose hidden permanent establishments (Italy). Based on recent public statements, 
it  seems  likely  that  a  few  more  MS  are  considering  a  specific  (indirect)  tax  on  revenues 
derived through intermediation and the provision of online advertising (UK) (HM Treasury, 
2017)  and  on  digital  B2B  transactions  with  electronically-supplied  services  (Italy), 
respectively, in the absence of coordinated action at EU or international level. 

123 

 
Table (1): Overview of unilateral measures taken/planned  

Country 

Planned/ 
adopted/ 
implemented 

Indirect taxes104 

In the European Union 

Hungary 

Implemented 
(2014), 
amended (2015, 
2017) 

Type of tax 

Brief description of the measure (where available) 

Tax on 
advertisement 

This tax is levied on any advertising activity, whether it is in printed or digital form. The tax is income based: a yearly income 
from advertising activity over HUF 100mn (approximately EUR 322,000) is taxed at the rate of 5.3%. 

UK 

Planned (2019)  Withholding tax 

on revenues 
derived from 
intermediation 
and the provision 
of online 
advertising 

104 VAT on digital services is not included here. 

An entity can be the subject of the advertising tax if it:  

 

 

publishes advertising for others, providing advertising services and realising income from such activities; 

publishes an advertising to promote its own services or products or (irrespective of where it is domiciled) orders 
advertising from a media content provider settled in Hungary.  

A withholding tax on the revenues that businesses generate from the provision of digital services in the UK market is being 
considered as a possible interim solution for taxing the digital economy. The tax would be levied on the revenues obtained 
through intermediation and the provision of online advertising. Most probably, the tax would not cover revenue generated 
through electronic sales of goods and from charging customers for the provision of digital or services. 

De minimis thresholds and mitigating provisions for loss-making and early-stage businesses are also being contemplated. 

124 

 
 
 
 
                                                 
Italy 

Planned (2019) 

Tax on digital 
B2B transactions 
with 
electronically-
supplied services 

A 3% equalization tax would be levied on payments (net of value-added tax) made to non-residents by Italian-resident 
purchasers of digital services (such as online advertising) carried out through electronic means (e.g. the internet or other 
electronic networks), regardless of where the transaction agreement is concluded. The equalization tax would apply only to 
B2B transactions (a threshold of minimum 3,000 transactions is provided in the law), i.e. transactions with companies, 
partnerships,  professionals and individuals that carry out an economic business in Italy, and on Italian PEs of foreign entities. 
B2C transactions would fall outside the scope of the proposed equalization tax. 

In principle, tax crediting for digital service providers subject to the equalization tax will be allowed. 

France 

Implemented 
(2003), 
amended (2016) 

Germany 

Implemented 
(2004), 
amended (2010) 

Romania 

Implemented 
(2005), 
amended (2008) 

Levy on access to 
content, including 
digital content by 
means of a video 
on demand / 
over-the-top 
online platform 
(for the 
cinematography 
fund) 

Levy on access to 
content, including 
digital content by 
means of a video 
on demand / 
over-the-top 
online platform 
(for the 
cinematography 
fund) 

Levy on access to 
content, including 
digital content by 
means of a video-
on-demand / 

The levy covers activities of making available services giving access (against consideration) to cinematographic or audiovisual 
works, on individual request formulated by an electronic communication method. Services whose audiovisual content is 
secondary, services whose main purpose is devoted to information and services that mainly provide information related to 
cinematographic and audiovisual works and to their dissemination and promotion, are exempt. 

The taxable amount is the amount paid by advertisers and sponsors, for the dissemination of their advertising services to the 
relevant taxpayers or the directors of advertising messages, excluding value-added tax. These sums are reduced by 4%. The 
reduction goes up to 66% in the case of services giving or allowing access to audiovisual content created by private users for 
sharing and exchanging within communities of interest. 

The film levy in Germany (Filmabgabe) helps financing the German Federal Film Board.  

The rate of the film levy is between 1.8% and 2.5% of the annual net sales. Video-on-demand providers that collect less than 
EUR 500,000 a year through cinematographic works are exempt from the levy 

Private broadcasters with free-to-air programs pay a film royalty on net advertising revenue. The film levy varies between 
0.15% and 0.95% and depends on the share of cinematographic films in the total broadcasting time. Private broadcasters  
whose total net revenue is less than EUR 750,000 for such services are exempt. 

Organizers of pay-tv and program marketers pay a fixed film levy amounting to 0.25% of their net sales in Germany, either 
with subscription contracts or for individual consideration. Suppliers who show no or only a few films (less than two percent 
of the total time) or whose total net sales with these offers is less than EUR 750,000 are exempt from the film levy. 

The mandatory contribution to the cinematography fund is levied at 3% on the turnover from audio and video content legally 
downloaded in digital format and at 1% on the turnover from the digital re-transmission of TV shows. 

125 

 
over-the-top 
online platform 
(for the 
cinematography 
fund) 

Levy on access to 
content, including 
digital content by 
means of a video-
on-demand online 
platform (for the 
cinematography 
fund) 

Levy on access to 
content, including 
digital content by 
means of a video-
on-demand online 
platform (for the 
cinematography 
fund) 

Levy on access to 
content, including 
digital content by 
means of a video-
on-demand online 
platform (for the 
cinematography 
fund) 

Levy on access to 
content, including 
digital content by 
means of a video-

Croatia 

Implemented 
(2007) 

Portugal 

Implemented 
(2007) 

Belgium 
(certain 
regions) 

Implemented 
(2009) 

Czech 
Republic 

Implemented 
(2012) 

The levy amounts to 2% of the taxable turnover. 

The levy amounts to 1% of the taxable turnover. There is an option between contribution to the cinematography fund or 
investment in production. 

In Wallonia and Brussels, contributors can opt either to transfer, respectively, 1.4% and 2.2% of the taxable turnover to the 
film fund or to make an equivalent investment directly in films. 

The levy amounts to 0.5% of the respective turnover. 

126 

 
on-demand online 
platform (for the 
cinematography 
fund) 

Levy on access to 
digital content 
and streaming 
services 

Levy on the 
provision of 
online 
advertisement 
services by non-
residents 

Levy on access to 
digital content 
and streaming 
services 

Levy on access to 
digital content 
and streaming 
services 

In third countries 

United 
States 
(certain 
states) 

India 

Implemented 
(2015-2016) 

Implemented 
(2016) 

Planned (2018) 

Planned (2018) 

Canada 
(certain 
states) 

Brazil 
(certain 
states) 

Direct tax initiatives targeting profit-shifting 

In the European Union 

The Indian 'equalisation levy' is imposed on e-commerce transactions whereby a resident or a non-resident with a permanent 
establishment carrying on a business or profession in India is obliged to withhold 6% equalisation levy from payments made to 
a non-resident service provider for specified services. These services include online advertisements, provision of digital 
advertising space, or any other facility or service for the purpose of online advertisements or any other notified services, except 
where the aggregate consideration for the specified service is less than INR 100,000 (EUR 1,300). 

The levy does not apply if the service provider is a non-resident who has a permanent establishment in India to which the 
service is effectively connected and such income is attributable. 

UK 

Implemented 

Diverted profits 

The diverted profits tax does not explicitly target 'digital companies' – it targets contrived arrangements that erode the UK tax 

127 

 
 
 
 
(2015) 

tax 

base through abuse of permanent establishment and transfer pricing rules. 

Italy 

Adopted (2017), 
in force (2018) 

Slovakia 

Adopted (2017), 
in force (2018) 

In third countries 

Israel 

Implemented 
(2016) 

Administrative 
procedure for 
large non-resident 
multinational 
enterprises 

Tax on income 
derived from 
intermediation 
through websites 
and online 
platforms  

The significant 
economic 
presence  test for 
non-resident 
enterprises 

The diverted profits tax applies to UK and foreign companies using contrived arrangements designed to erode the UK tax base 
in the following two situations: 

 
 

if a foreign company artificially avoids having a permanent establishment in the UK; 
if a UK company, or a foreign company with a UK permanent establishment, creates a tax advantage by using 
connected entities for transactions that lack economic substance. 

This administrative procedure introduces an option for foreign companies that meet certain thresholds to discuss (and agree) in 
advance with the Italian tax authority the existence there of a permanent establishment. 

The terms apply to digital companies not headquartered in Italy having:  

 
 

at least EUR 1 billion in global revenue; and 
sales in Italy of at least EUR 50 million. 

The tax will be levied at a rate of 21 % on the income of 'digital platforms', non-resident in Slovakia, despite the absence of a 
fixed place of business in this country. The proposed legislation defines digital platforms very broadly as 'hardware or software 
platforms required for the creation of applications and their management'. 

Under well-defined circumstances income of foreign corporations from the sale of goods or provision of services via the 
internet may be attributed to a 'deemed permanent establishment' in Israel if: 

 

 

 

 

the foreign company maintains an operation in Israel; 

the foreign company sells directly products or services to clients in Israel or connects with customers in Israel through 
a local website (for instance, by way of a website operated in Hebrew language for Israeli market purposes); 

representatives  in  Israel  of  the  foreign  company  are  involved  in  identifying  Israeli  customers  and/or  gathering 
information; or 

the  foreign  company has  provided  authority to  an  Israeli  representative to  engage  in  transactions  locally  which  are 
binding on the foreign company. 

128 

 
Australia 

Implemented 
(2017) 

Diverted profits 
tax and additional 
anti-avoidance 
rule for large 
non-resident 
multinational 
enterprises 

India 

Planned (2018)  New concept of 

significant 
economic 
presence 

The diverted profit tax aims to ensure that the tax paid by significant global entities properly reflects the economic substance of 
their activities in Australia and aims to prevent the diversion of profits offshore through contrived arrangements. 

Australia’s diverted profit tax applies to multinational enterprises, which are qualified as 'significant global entities', i.e. with 
annual global income of at least AUD 1 billion, that enter into a scheme which: 

 

 

has at least one of the parties connected to the scheme being a foreign entity; and 

results in a 'diverted profit tax benefit', as defined in the law. 

There is also a de minimis threshold of AUD 25 million (for the local income) aimed at ensuring that the diverted profit tax 
only applies to companies that have sufficiently large operations in Australia. 

The Finance Minister of India proposed, in the context of the Union Budget 2018, to introduce the concept of a 'significant 
economic presence'. A significant economic presence for this purpose shall mean  

 

 

any transaction in respect of any goods, services or property carried out by a non-resident in India, including a 
provision of download of data or software in India, if the aggregate of payments arising from such transaction or 
transactions during the previous year exceeds the amount as may be prescribed; or 

systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as 
may be prescribed, in India through digital means. 

The proposed amendment in the domestic law aims to enable India to negotiate for inclusion of the new nexus rule in its 
Double Taxation Agreements. The thresholds of 'revenue' and the 'users' would be decided after consultation with stakeholders. 

United 
States 

Adopted (2017), 
in force (2018) 

The introduction 
of the concept of 
'base erosion anti-
abuse tax'  for 
large 
multinational 
enterprises 

The new provision refers to base erosion as tax reduction strategies employed by multinational corporations that exploit 
differences between the tax laws of different countries in order to minimise or eliminate the amount of corporate tax paid. With 
respect to base erosion payments paid or accrued in tax years that begin after 31 December 2017, 'applicable taxpayers' are 
now required to pay a tax, the 'base erosion anti-abuse tax' (BEAT), equal to the 'base erosion minimum tax amount' for the tax 
year.  

Applicable taxpayers are corporations (except for certain type of corporations) with average annual gross receipts of at least 
USD 500 million and a 'base erosion percentage' of at least 3% (2% for certain banks and securities dealers). This percentage is 
equal to the aggregate amount of base erosion tax benefits of the taxpayer for the tax year divided by the aggregate amount of 
specified deductions allowable to the taxpayer for the tax year. A base erosion payment, in turn, generally means  

 

any amount paid or accrued by a taxpayer to a foreign person that is a related party of the taxpayer; and 

  with respect to which a deduction is allowable, including any amount paid or accrued by the taxpayer to the related 

party in connection with the acquisition by the taxpayer from the related party of property of a character subject to the 

129 

 
Source: Commission analysis based on various sources, such as national legislations, replies to the Member State consultation or other government sources, websites of 
national film funds, European Film Agency Directors (EFADS) website, website of the International Bureau of Fiscal Documentation (IBFD - for most of the direct tax 
initiatives) and Thomson Reuters Tax & Accounting for the US BEAT measure. 

allowance of depreciation (or amortisation instead of depreciation). 

130 

 
 
i.  DIFFICULTY TO TAX/OPPORTUNITIES FOR TAX AVOIDANCE 

ANNEX  7: WHAT ARE THE CONSEQUENCES? 

(a) Misalignment of value creation and taxes 

For  globally  active  companies  that  do  not  require  physical  presence  to  gather  and 
process data there is a misalignment between value creation and taxation.105 The use of 
intangibles and of data knowledge (including consumer data) and other user contributions to 
improve  or  develop  products  and  services  or  to  define  marketing,  sales and  pricing  policies 
has increased considerably, although it is not a new phenomenon. It does not raise tax issues 
as  long  as  a  company's  activities  are  pre-dominantly  domestic,  in  which  case  all  value 
creation would also be 'domestically' captured for taxing purposes. However, it does raise an 
issue in a global context. The current permanent establishment and transfer pricing rules that 
address the questions 'where to tax' and 'how much to tax' do not take into account the user 
contribution  in  the  allocation  of  taxable  profits,  which  results  in  a  mismatch  with  the  value 
creation. The views of stakeholders have been tested on this topic: 67% of respondents to the 
open  public  consultation  as  well  as  15  out  of  21  national  tax  authorities  agree  with  the 
statement  that  "states  are  not  able  to  collect  taxes  on  the  value  that  some  digital  companies 
create on their territory". 

(b) Avoidance of permanent establishment rules 

Difficulties to tax and/or opportunities for tax avoidance arise in relation to the current 
permanent establishment rules and transfer pricing rules. First, as the current permanent 
establishment  rules  are  grounded  in  physical  presence  they  often  do  not  capture  digital 
activities  or  can  be  easily  circumvented  in  relation  to  such  activities.  Second,  even  where 
there is a permanent establishment, tax can be avoided by shifting mobile intellectual property 
to low tax jurisdictions resulting in intra-group payments for which an objective transfer price 
is difficult to determine.    

Article  5  of  the  OECD  Model  Tax  Convention  provides  that  the  business  profits  of  an 
enterprise which is not resident for tax purposes in a certain jurisdiction become taxable 
there only to the extent that the enterprise has a permanent establishment in that state. 
The concept of PE requires some physical presence and permanence in a jurisdiction. While 
those two criteria are relevant for the traditional economy, they do not necessarily address the 
stakes  of  the  digital  economy.  This  is  notably  because  the  ability  to  carry  out  business 
activities  remotely  has  been  increased  in  the  digital  economy.  As  a  result,  even  sizeable 
digital  activities  in  a  location  do  not  always  result  in  a  permanent  establishment  in  that 
location.  And,  even  if  such  a  permanent  establishment  is  triggered  in  the  absence  of  tax 
planning,  it  often  is  fairly  easy  for  digital  economy  businesses  to  find  arrangements  that 
circumvent the existence of a permanent establishment. 

105 That is, the phenomenon of disintermediation due to a process of dematerialisation in the business model of 
digitalised firms. 

 
 
 
                                                 
In particular, the avoidance of permanenet establishments happens in practice through 
the use of commissionaire arrangements and arrangements that escape the PE status by 
treating  some  critical  functions  as  auxiliary.    Through  commissionaire  arrangements  a 
person sells products in a state in its own name but on behalf of a foreign enterprise that is the 
owner  of  these  products.  In  this  way,  a  company  is  able  to  avoid  the  status  of  a  permanent 
establishment and  thus  escape  corporate income tax on the profits generated by the sales  in 
that  state.  Similar  results  can  be  achieved  through  arrangements  where  contracts  that  are 
substantially negotiated in one state are not concluded in that state because they are finalised 
or authorised abroad, or where the person who concludes contracts is an 'independent agent' to 
whom  the  exception  of  Article  5(6)  is  applicable.  Moreover,  Article  5(4)  includes  'specific 
activity  exemptions'  according  to  which  a  permanent  establishment  is  deemed  not  to  exist 
where  a  place  of  business  is  only  used  to  carry  out  the  activities  listed  in  that  paragraph. 
Businesses  have  been  able  to  avoid  creating  a  permanent  establishment  in  a  country  by 
categorising  their  business  activity  as  qualifying  for  one  of  the  exemptions  from  permanent 
establishment status. Another possibility to trigger the Article 5(4) exemption is by breaking 
up  into  several  small  operations  in  order  to  claim  that  each  part  is  merely  engaged  in 
preparatory or auxiliary activities.  

In  the  context  of  Action  7  of  the  G20/OECD  BEPS  project,  amendments  to  the 
permanent establishment rules in the OECD Model Tax Convention were proposed, but 
these are not legally binding. Article 5 has been amended to ensure that, where the activities 
of an intermediary result in the regular conclusion of contracts to be performed by a foreign 
enterprise,  that  enterprise  should  be  considered  to  have  a  sufficient  taxable  nexus  in  that 
country.106  The  new  rules  also  tighten  the  definition  of  independent  agent.  The  changes 
proposed  under  Action  7  prevent  this  by  limiting  the  exemptions  to  activities  that  are  of  a 
preparatory or auxiliary character i.e. business can only qualify for these exemptions if this 
activity is not a core part of their business model. So a large warehouse maintained by online 
sales  business  for  the  purpose  of  storing  and  delivering  goods  sold  by  that  business  would 
constitute an essential part of the sales and distribution function of that business, and so the 
warehousing function would not qualify for the preparatory and auxiliary activity exemption 
from PE status any more. Those amendments are implemented either in the course of bilateral 
tax  treaty  negotiations  or  through  the  Multilateral  Convention  to  Implement  Tax  Treaty 
Related  Measures  to  Prevent  BEPS  (known  as  the  ‘Multilateral  Instrument’),  but  some 
countries have reserved against  these. At EU level,  the 2016 Commission Recommendation 
on  the  implementation  of  measures  against  tax  treaty  abuse  encourages  Member  States  to 
implement the proposed provisions, but it is not a legally-binding tool.  

106 "For example, where the sales force of a local subsidiary of an online seller of tangible products or an online 
provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective 
large  clients  for  those  products  or  services,  and  these  contracts  are  routinely  concluded  without  material 
modification  by  the  parent  company,  this  activity  would  result  in  a  permanent  establishment  for  the  parent 
company." (OECD, 2015b). 

132 

 
 
                                                 
Furthermore,  the  final  report  on  Action  1  of  the  G20/OECD  Base  Erosion  and  Profit 
Shifting BEPS project examined the relevance of defining a new nexus in the form of a 
significant  economic  presence.  The  economic  presence  would  be  assessed  on  the  basis  of 
various  elements  such  as  revenues,  digital  factors  (local  domain  names,  local  digital 
platforms, local payment options) and users-based factors (such as number of 'monthly active 
users',  online  contract  conclusion  or  data  collected).  This  new  nexus  was  not  part  of  the 
recommendation.  However,  the  report  made  clear  that  the  evolution  of  the  digital  economy 
warranted further work on the issue and a monitoring of the developments. 

c) Transfer of intangible assets 

Intangible assets can fairly easily be shifted from one jurisdiction to another, which in 
the  absence  of  abuse-proof  rules  opens  significant  opportunities  for  aggressive  tax 
planning. The high mobility of intangible assets allows more digitalised companies to benefit 
from  certain  tax  regimes  and  push  down  their  tax  burden.  Profits  allocation  rules  follow 
contractual  arrangements  of  transactions  between  intragroup  companies.  Indeed,  legal 
ownership of intangibles is a decisive factor for determining profits, resulting in entities with 
little  business  activity  potentially  benefitting  from  high  profit  allocation  (see  discussion  in 
Olbert and Spengel, 2017). 

Econometric  evidence  shows  the  importance  of  the  location  of  intangible  assets,  and 
notably  intellectual  property,  in  profit  shifting  strategies.  First,  intellectual  property  is 
difficult to value, with often no unrelated third-party transaction to determine an arm's length 
price.  This  makes  it  easier  to  shift  profits  through  transfer-price  manipulation.  Second, 
corporate  taxation,  notably  the  preferential  tax  treatment  of  intellectual  property,  influences 
the  location  of  research  activities,  of  legal  patent  ownership  and  of  the  number  of  patent 
applications.  Dischinger  and  Riedel  (2011)  find  that  a  one  percentage  point  increase  in  the 
average  tax  difference  to  all  other  group  affiliates  increases  the  subsidiary's  intellectual 
property in the balance sheet by about 1.7%.  Skeie et al. (2017) find that a 5 percentage point 
cut  in  the  preferential  tax  rate  on  patent  income  is  associated  with  a  6%  increase  in  patent 
applications. Several contributions evidence more generally the significant effect of corporate 
taxation  on  the  number  of  patent  applications  (Karkinsky  and  Riedel,  2012,  Griffith  et  al., 
2014, Alstadtsaeter et al., 2018). Alstadtsaeter et al. (2018) find that the effect is mostly due to 
the favourable tax treatment of patent boxes (and not due to a possible favourable impact on 
R&D activities), with quite large differences across sectors. As shown in Böhm et al. (2012) 
the probability of patent relocation to a tax haven is increasing with the value of the patent. 
Furthermore,  the  literature  provides  evidence  that  controlled  foreign  company  -  rules 

133 

 
 
 
effectively  reduce  this  form  of  profit  shifting.107  In  general,  Beer  and  Loeprick  (2015)  find 
that  mandatory  documentation  requirements  are  effective  in  reducing  profit  shifting  by 
transfer pricing, but this result does not hold for subsidiaries with large intangible assets.   

A  detailed  examination  of  tax  rules  confirms  the  profit  shifting  opportunities 
multinational enterprises with sizeable intangible assets have. Out of seven important tax 
planning  structures  identified  by  Ramboll  Management  Consulting  and  Corit  Advisory 
(2015),  three  involve  the  use  of  intellectual  property.  The  same  study  determines  the 
prevalence across Member States of tax rules that are necessary or conducive for the set-up of 
aggressive tax planning schemes. It identifies 15 Member States whose tax frameworks have 
elements  that  directly  promote  or  prompt  an  aggressive  tax  planning  structure.  All  but  two 
Member  States  show  a  lack  of  anti-abuse  rules.  ZEW  (2016)  estimates  the  impact  of 
aggressive  cross-border  tax  planning  schemes  on  the  effective  average  tax  rates.  It  shows 
without ambiguity that placing intellectual property in a country with a generous intellectual 
property box allows lowering the effective average tax rate significantly - and more than any 
other tax planning structure. The Anti-Tax Avoidance Directive, which will enter into force in 
2019  (with  some  exceptions),  should  however  strengthen  the  anti-abuse  framework  in  all 
Member States through the introduction of a number of legally binding anti-abuse measures. 
Table 3 summarizes the findings of recent studies on the use of intangibles for profits shifting 
purposes. 

Table (1): Overview of studies evidencing the link between aggressive  tax planning and 
intangible assets  
Dischinger and 
Riedel (2011)  

Europe 
2005)  

(1995-

Intangible 
assets 
the 
in 
balance sheets  

Karkinsky and 
Riedel (2012)  

Europe 
2007)  

(1978-

Patent 
holdings  

Griffith et al. 
(2014)  

Europe 
2005)  

(1985-

Patent 
holdings  

Beer and 
Loeprick (2015)  

World  (ORBIS) 
(2003-2011)  

Tax  sensitivity 
reported 
of 
profits 
and 
endowment  of 

increases 

-  1  p.p.  increase  in  the  average 
tax  difference  to  all  other  group 
affiliates 
the 
subsidiary's  intangible  assets  in 
the balance sheet by about 1.7%  
+1  p.p.  of  CIT  rate  decreases 
patent  applications  by  about 
3.5%-3.8%  (depending  on  the 
empirical model)  
+1  p.p.  of  CIT  rate  decreases 
patent  applications  by  about 
0.5%-3.9%  (depending  on  the 
location)  
Tax sensitivity of reported profits 
to 1 p.p. increase of the CIT rate 
increases from 0.76% to 1.2% for 
above 
subsidiaries  with 

an 

107  A  side  effect  of  this  may  be  that  stronger  anti-avoidance  rules  result  in  increased  tax  sensitivity  of  real 
investment, the rationale being that tax planning MNEs do not care much about tax levels as anyway they largely 
avoid tax (Sorbe and Johansson, 2016). 

134 

 
 
 
                                                 
Böhm et al. 
(2012)  

Europe 
2007)  

(1978-

intangible 
assets  
Probability  of 
patent 
to 
relocation 
tax  haven  and 
effectiveness 
of 
legislation  

CFC 

Alstadtsaeter, 
Barrios, 
Nicodeme, 
Skonieczna and 
Vezzani (2018) 

World 
(2000-
2011)  top  2,000 
corporate  R&D 
investors  

Patent 
holdings  

in  a 

assets 

patent 

intangible 

tax  haven 

increase  of  1 
of 

median 
endowment.  
standard 
An 
deviation 
value 
increases the probability of patent 
relocation in a tax haven by about 
16%.  This  probability  of  patent 
is 
relocation 
reduced  by  about  1/3  by  CFC 
legislation.  
+  1  p.p.  of  CIT  rate  decreases 
patent  applications  by  about 
(pharmaceutical),  1.5% 
13.1% 
(ICT  sector)  and  5.4% 
(car 
sector).  The  presence  of  patent 
boxes has a strong and significant 
effect on patent applications.  
5p.p.  of  preferential  tax  rate  on 
patent  income  is  associated  with 
6% 
patent 
applications. 

increase 

in 

Tax  sensitivity 
patent 
in 
location 

Skeie et al. 
(2016)   

Sorbe and 
Johansson 
(2016) 

(ORBIS 
OECD-

World 
and 
PATSTAT) 
(2004-2010) 

industry 
(world 

World 
level 
Input-output 
Database) 
(1995-2011) and 
firm 
level 
(ORBIS) (2009) 

of 
anti-

Impact 
strong 
avoidance 
tax 
rules  on 
sensitivity  of 
investment 

At  the  75th  percentile  of  the 
distribution  of 
industries  on 
profit-shifting incentives, moving 
from  a  moderate  anti-avoidance 
strength  to  a  strong  stance  is 
associated  to  about  tripling  the 
tax sensitivity of investment. 

Source: updated from Table 3 in SWD(2015) 121 final 

Aggressive tax planning opportunities using Intellectual Property are not unique to the 
digital economy, but they are bigger. Given the larger emphasis on intangible assets in the 
digital economy (section 2.1.3) and the role of intellectual property for the sector, as discussed 
above, the opportunities are likely more significant than for traditional businesses.  

ii.  LACK OF A LEVEL PLAYING FIELD AND DISTORTION OF COMPETITION 

Both  the  outdated  rules  that  do  not  properly  capture  digital  activities  and  the  relative 
ease with which more digitalised companies can engage in aggressive tax planning result 
in  competitive  distortions.  These  distortions  manifest  themselves  in  various  ways.  They 
create  an  unlevel  playing  field  between  different  types  of  companies.  This  is  not  only  true 
between those  companies that are more digitalised and those that are less, but  also between 
digital companies that pay tax in a given Member State and those that serve the same market 

135 

 
 
 
 
remotely or minimise payments through aggressive tax planning. They also create an unlevel 
playing field across the Single market, as some Member States feature more prominently in 
tax  planning  schemes  than  others.  In  the  worst  case,  a  significantly  lower  tax  burden  can 
enable  larger  digitalised  companies  to  drive  out  competitors  from  their  markets  or  hinder 
potential  new  entrants.  This  is  economically  inefficient  and  hurts  innovation,  growth  and 
welfare. 

Some  evidence  exists,  suggesting  that  tax  planning  results  in  higher  mark-ups  and 
competitive  advantages.  Sorbe  and  Johannson  (2016)  analyse  firm-level  data  from  46 
countries (mostly OECD and G-20). They find that multinational enterprises that have access 
to  tax  planning  opportunities  have  mark-ups  that  are  13%  higher  than  multinational 
enterprises that do not have this opportunity. Thy also find that restricting their sample to EU 
countries results in an even stronger effect. Industry concentration is also higher in industries 
with  more  multinational  enterprises,  but  this  may  be  driven  by  the  fact  that  multinational 
enterprises  tend  to  be  larger.  A  recent  study  on  the  media  industry  in  the  Nordic  countries 
(PWC, 2017) argues that there are considerable differences in the direct tax burden between 
Nordic  media  players  and  global  players,  which  result  in  a  competitive  advantage  for  the 
global players.  

Digital  businesses  models  in  the  EU  face  a  lower  effective  average  tax  burden  than 
traditional  business  models.  Based  on  stylised  business  models,  ZEW  (2017)  finds  that  a 
cross-border  digital  business  model  is  subject  to  an  effective  average  tax  rate  of  only  10% 
compared  to  a  rate  of  23%  of  a  cross-border  traditional  business.  Three  factors  explain  this 
difference.  Expenses  for  the  creation  of  software  and  other  intangible  goods,  which  play  a 
much bigger role for digital businesses,108 are often immediately deductible whereas physical 
assets used in the traditional business model are depreciated over time. Businesses active in 
digital activities typically spend relatively more on R&D activities, for which many countries 
apply  tax  incentives.  Finally,  an  important  number  of  countries  offer  lower  tax  rates  for 
earnings derived from intellectual property ('Intellectual Property boxes'). To a certain extent, 
the lower tax levels simply reflect that modern tax policy recognises the importance of R&D 
and  digitalisation  for  future  growth  and  prosperity.  However,  beneficial  regimes  targeting 
very mobile assets also indicate that countries compete fiercely on this very mobile segment.  

Through aggressive tax planning digital businesses can reduce their effective tax burden 
even further. By placing intellectual property in an intermediary company located in an EU 
country with an attractive intellectual property box regime, companies can achieve effective 

108  By  assumption,  the  digital  business  owns  assets  of  only  three  kinds:  intangible  assets,  software  and  IT 
hardware.  

136 

 
 
                                                 
average tax rate levels of zero and below (i.e. their activity is effectively subsidised).109 Table 
(2) reports effective average tax rates for different business models and type of companies. 

Table (2): Effective average tax rates of different model companies 

Domestic 
company 

Multinational group  Multinational 

group 

in 
tax  planning  using  most 

engaged 

aggressive 
beneficial IP box regime 

Traditional 
model 
Digital business model 

business 

20.9 

8.5 

23.2 

9.5 

16.2 

-2.3 

Source: Own computations based on ZEW (2016, 2017) and ZEW et al.  (2017). 
Notes: 1/ Aggressive tax planning by the multinational group is assumed to be done though exploitation of the 
most beneficial intellectual property regime available in the EU. 2/ For the multinational groups, cross-border 
investments  within  the  EU  and  with  certain  third  countries  (notably:  US,  Canada,  Japan,  Norway  and 
Switzerland) are considered. 3/ The 9.5% for the multinational group with a digital business model is an average 
of 8.9% for a business-to-business model and 10.1% for a business-to-consumer model. 

Both  the  national  tax  authorities  as  well  as  the  wider  public  that  responded  to  the  public 
consultation  have  confirmed  that  the  competition  between  the  traditional  economy  and  the 
digital  one  is  not  an  equal  one.  13  out  of  21  national  tax  authorities  and  65%  of  the 
respondents  to  the  public  consultation  agree  that  "the  current  international  taxation  rules  do 
not allow for fair competition between traditional and digital companies".   

iii.  LESS REVENUE FOR PUBLIC BUDGETS/NEGATIVE IMPACT ON SOCIAL FAIRNESS 

Lower  (or  even  no)  taxes  paid  on  profits  from  digital  activities  puts  at  risk  the 
sustainability  of  EU  Member  States'  public  finances.  It  results  in  unfair  burden  sharing 
across  taxpayers,  constraints  the  financing  of  our  social  models and  ultimately  weakens  our 
social contract. Although it is difficult to isolate the share of digital activities, the tax revenue 
shortfalls from aggressive tax planning activities cost billions of euros every year. It has been 
estimated in a study for the European Parliament that within the EU the corporate tax revenue 
losses  amount  to  about EUR 50-70  billion (Dover et al., 2015).110 This  is  equivalent on the 
lower bound to around 0.4% of GDP. Governments of countries, whose tax bases are eroded, 
either  have  to  raise  revenue  from  other  taxes  or  have  less  revenues  for  growth-enhancing 
reforms and for redistribution purposes to fight inequalities. Recent new estimates by Tørsløv 

109 ZEW (2016) 
110 Their methodology assumes that national deviations from the average corporate tax to gross operating surplus 
of companies ratio are due to tax avoidance. 

137 

 
 
  
 
 
 
                                                 
et al. (2017) following the Paradise papers scandal show that the aggregated loss to tax havens 
for Germany, France, Italy and Spain would reach over EUR 40 billion per year (Figure 1).  

The  perception  of  the  social  fairness  of  the  tax  system  suffers  if  companies  do  not 
contribute their 'fair share' to budgets. Digital businesses conducting sizeable activities in 
a  jurisdiction  will  usually  also  benefit  from  the  public  infrastructure  offered  by  that 
jurisdiction.  For  mostly  'web-based'  companies,  this  will  include  the  physical  internet 
infrastructure, rule of law and judiciary in the country, but also the education and digital skills 
of potential users. Within the Single market, all companies with cross-border activities benefit 
from  the  fundamental  freedoms.  Therefore,  a  non-contribution  to  public  budgets  is  seen  as 
inherently  unfair  by  many  and  can  undermine  taxpayer  morale.  This  perception  is  widely 
shared  by  both  the  national  tax  administrations  as  well  as  the  respondents  to  the  public 
consultations. 14 out of 21 tax administrations as well as 67% of respondent agree that "social 
fairness is impacted because some digital companies do not pay their fair share of taxes".     

Figure (1): Tax revenue losses per year to tax havens (in billion EUR) 111 

Austria

Sweden

Spain

Italy

France

United Kingdom

Germany

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

18,0

Absolute tax losses (€ billion) 

Source: Torslov, Wier and Zucman (2017) 

iv.  RISK OF FURTHER SINGLE MARKET FRAGMENTATION 

As the problem becomes more pressing, Member States face increased pressure to adopt 
national solutions, in the areas of both direct and indirect taxation. Some Member States 
already have in place targeted regimes, while others are planning to introduce such regimes.   

111 https://www.theguardian.com/commentisfree/2017/nov/08/tax-havens-dodging-theft-multinationals-avoiding-
tax  

138 

 
 
 
 
                                                 
Most  recent  national  tax  measures  to  address  the  digital  economy  are  in  the  area  of 
indirect taxation. Hungary introduced an advertisement tax in 2014 and further amended it in 
2015),  while  Slovakia  recently  started  to  tax  fees  resulting  from  intermediation  through 
websites  and  online  platforms  (2018).  Certain contributions  come  in  the  form  of  para-fiscal 
taxes  or  levies,  such  as  those  imposed  in  France  and  Germany  on  the  access  to  content, 
including  digital  content.112  In  other  countries,  various  legislative  initiatives  are  being 
discussed to target digitalised companies, based either on turnover or on sales stemming from 
certain parts of their business, such as intermediation and the provision of online advertising 
(UK) or digital B2B transactions of electronically supplied services (Italy).113 Furthermore, a 
group of Member States recently called for a new taxation intended to re-capture part of what 
the digitalised companies should be paying in terms of corporate income tax in the form of a 
so-called 'equalisation levy' imposed on the turnover of such companies114. 

In the realm of direct taxes, the measures introduced so far deal with the profit-shifting 
issue  in  general,  and  are  not  specifically  targeting  digitalised  companies.  The  United 
Kingdom has introduced a measure in the form of a 'diverted profit tax' as of 2015 and Italy 
has introduced new administrative procedures for large non-resident MNEs as of 2018. Table 
(6) in section 9.1 and Table (1) in Annex 6 provide an overview of relevant national taxes. 

An  uncoordinated  implementation  of  national  measures  adds  distortions  to  the 
functioning of the single market, also contributing to business uncertainty on the future 
tax  framework.  The  introduction  of  country-specific  tax  regimes  leads  to  distortions  of 
competition  and  may  result  in  double  taxation  of  digitalised  companies  that  supply  cross-
border services in the single market. This hurts the competitiveness of the EU as a whole and 
adds uncertainty. Moreover, a patchwork of national measures generates new incentives and 
opportunities  for  tax  arbitrage.  15  out  of  the  21  national  tax  authorities  questioned  on  this 
topic  agree  that  "the  current  situation  could  push  some  Member  States  toward  adopting 
uncoordinated  measures  that  would  lead  to  the  fragmentation  of  the  Single  market".  In  the 
case  of  the  respondents  to  the  public  consultation,  this  risk  has  been  identified  by  82%  of 
them,  signaling  that  stakeholders  are  weary  of  the  possible  consequences  that  the  current 
situation might have, in the absence of a coordinated approach. 

112  Such  levies  are  used  to  finance  funds  dedicated  to  the  support  of  the  development  of  domestic 
cinematography and content. Also, in the context of the revision of the Audio-visual Media Services Directive, 
the  Commission  has  proposed  (COM  2016/0287  final,  Art.  13)  to  allow  Member  States  to  impose  financial 
contributions  (direct  investments  or  levies  allocated  to  national  film  funds)  to  on-demand  services  in  their 
jurisdictions as well as, under certain conditions, to those established in a different Member State but targeting 
their national audiences. 
113 See Annex 6 for further details. 
114 See the Political statement/Joint initiative on the taxation of companies operating in the digital economy – 
http://www.mef.gov.it/inevidenza/banner/170907_joint_initiative_digital_taxation.pdf submitted by Germany, 
France, Italy and Spain to the Estonian Presidency of the Council in September 2017. 

139 

 
 
 
                                                 
ANNEX 8: METHODOLGY BEHIND REVENUE ESTIMATES FOR THE 
INTERIM OPTIONS 

TOP-DOWN ESTIMATES 

The  starting  point  is  data  and  forecasts  published  by  Statista  on  revenue  in  different  digital 
markets.  Statista  classifies  the  digital  market  into  8  main  categories  (e-services115,  e-
commerce,  digital  media,  digital  advertising,  e-travel,  connected  car,  e-health,  smart  home), 
which are further broken down in subcategories. Cloud computing is covered separately. For 
e-payment  there  has  been  no  reliable  data  on  revenues  earned  in  the  sector  (only  on 
transaction  volumes).  Note  that  e-commerce,  connected  car,  e-health,  and  smart  home  all 
relate  to  applications  for  physical  goods  and  are  not  within  the  scope  of  this  exercise.  The 
table  below  shows  how  these  categories  relate  to  the  business  models  used  in  this  impact 
assessment. As reference year, Statista forecasts for 2019 were used. All estimates are static, 
that is they do not take into account any behavioural responses. 

Classification in this impact assessment 
Advertising 
Marketplace/intermediary 
Digital content/solutions 
  of which digital media 

Statista classification 
Digital advertising 
E-services and e-travel 
Digital media and cloud computing 
  Digital media 

Data from the AMECO database on GDP in 2019 and the US dollar/EUR exchange rate were 
used to convert figures into EUR and GDP figures. To arrive at shares of turnover earned by 
companies  above  the  general  revenue  threshold,  an  analsyis  done  for  the  CCCTB  impact 
assessment based on firm level data (from the Orbis database) was used. This gave the share 
of entities and share in turnover of companies above a, respectively, EUR 50/500/750 million 
threshold. A caveat is that it may well be that the size distribution is different for companies 
in the digital sector.  A specific revenue threshold on relevant digital activities is not explicitly 
accounted  for  in  these  estimates.  At  least  for  most  relevant  companies  above  the  EUR  750 
million threshold and with significant relevant activities the specific threshold is not expected 
to be binding.  

115 E-services is composed mainly of event tickets, restaurant delivery/online takeaway, fitness applications, and 
online dating services.  

140 

 
 
 
 
 
 
                                                 
In  the  gross  revenue  estimates,  the  pure  revenue  from  the  new  tax  is  computed.  In  the  net 
revenue  estimates,  it is assumed that  the digital revenue tax would be a deductible business 
expense  for  corporate  income  tax  purposes,  which  would  reduce  corporate  income  tax 
revenue. To account for this, we used the average statutory corporate income tax rate in the 
EU (about 23%).  

BOTTOM-UP ESTIMATES 

The  starting  point  for  the  analysis  was  a  list  of  112  large  multinational  companies.  These 
include the 100 top global digital multinational companies analysed in UNCTAD (2017b) in 
addition to 12 other companies that were also considered relevant and have not been covered 
in  the  UNCTAD  report,  in  some  cases  since  they  required  that  companies  publish  certain 
information in their financial reports. The 12 companies that were added are from each of the 
four business models analysed in this impact assessment.   

Web  Visits  were  obtained  from  SimilarWeb  (www.similarweb.com)  by  adding  up  all  visits 
from residents of a country to a domain, and then summing up all domains and sub-domains 
belonging to the same  company. Web visits data were obtained by SimilarWeb for the year 
2016  and  the  first  semester  of  2017.  Estimates  for  sales  are  obtained  by  allocating  global 
consolidated turnover (for 2017 or, if not available, 2016 or 2015) for the 112 companies to 
each  country  proportionally  to  the  share  of  Web  visits.  The  top  companies  were  selected 
ranking them by global consolidated revenues, based on data published by UNCTAD. The list 
includes  a  heterogeneous  set  of  companies  who  mostly  operate  their  business  through  the 
Internet  (i.e.  search  engines,  social  networks,  media  content  providers,  cloud  computing 
services,  e-commerce  companies,  providers  of  financial  information  and  data,  payment 
platforms).  The  largest  company  included  has  global  consolidated  revenues  of  about  US 
dollar  136  billion;  the  smallest  of  about  0.4  BLN/USD.  To  convert  US  dollar  to  euros,  an 
average exchange rate of 0.90 was assumed. 

The measures of web visits to the web domains of these selected companies are used to proxy 
for the amount of sales that would be assigned to a given EU Member country according to a 
proportionality criterion. The ratio of total Web visits originated from an EU Member State 
over  global  Web  visits  is  multiplied  by  global  revenues  to  obtain  the  bottom-up  tax  base 
estimates. These revenue figures are then employed to estimate the gross revenue effects of a 
revenue tax, assuming that the tax is designed in a way that allows to capture the full amount 
of imputed value.  

Some caveats are in order with respect to the calculations: 

1.  Some companies use web domains as part of their marketing strategy, differentiating 
between  countries  and  consumer  profiles.  Often  there  is  no  comprehensive  list 

141 

 
 
 
available  of  all  the  domains  belonging  to  a  company,  so  information  from  multiple 
sources  was  exploited  (Google,  Wikipedia,  specialized  Web  sites)  to  match  Web 
domains  to  companies.  The  resulting  domain  list  is  very  comprehensive  but  still, 
possibly incomplete.  

2.  A comparison of sales figures reported in the financial accounts of some very large e-
commerce  companies  using  Orbis  data  against  the  corresponding  measure  of  web 
visits shows that they positively and significantly correlate. Some of the companies in 
the list though are not as well captured by web visits as a proxy for the location of web 
sales.  This  is  the case  for  hardware  or  information  providers  who  might  be  using  IP 
addresses  not  associated  with  a  web  domain.  The  same  holds  for  videogame 
producers,  because  games  on  the  internet  are  often  sold  and  operated  through 
intermediaries who may have their own web domains. For these companies therefore 
the allocation of sales by country based on Web visits can be less dependable. Note, 
though,  that  these  companies  are  minority  in  the  list,  both  in  terms  of  number  of 
company appearing in the list, even more so in terms of their overall sales (about 11% 
of total revenues from all included companies).  

142 

 
 
 
 
 
 
 
 
 
 
ANNEX  9: PROPERTIES OF A DESTINATION-BASED CASH-FLOW TAX  

The destination-based cash flow tax (DBCFT) has the potential to do away with most of 
the significant distortions embedded in traditional corporate tax systems. Theoretically it 
can address tax induced distortions i) to the amount and type of domestic investment, ii) to the 
financing choice between debt and equity, iii) to the choice of organisational form, iv) to the 
international  location  of  real  investment,  and  to  v)  the  international  location  of  tax  base 
(Devereux and Sorensen, 2006).  

A number of its beneficial properties are not dependent on universal adoption but can 
also  be  re-aped  when  implemented  unilaterally.  With  a  cash  flow  tax,  marginal 
investments, i.e. those investments that are just worthwhile being undertaken in the absence of 
any tax, are not taxed. As a result the level of investment is the same as if there was no tax at 
all.    Moreover,  debt  and  equity  financing  costs  receive  the  same  tax  treatment.  Another 
theoretical  advantage  is  the  simplicity  of  the  system  as  recording  of  cash  flows  is  easy.  A 
destination-based  cash  flow  tax  adds  an  element  of  border  adjustment,  which  shifts  the 
taxation right to the place of sale of a good or service.  

However, in addressing international distortions, it is important to distinguish universal 
adoption  by  all  countries  from  a  unilateral  or  only  partial  adoption.    Distortions  to  the 
location  of  real  investments  would  only  be  removed  if  the  tax  is  adopted  by  all  countries. 
Otherwise,  there  would  be  a  tax  induced  incentive  to  locate  these  investments  in  the 
jurisdiction that operates the destination-based cash flow tax. Finally, only if it were adopted 
universally,  the  system  is  robust  against  tax  avoidance  through  inter-company  transactions 
(Auerbach  et  al.,  2017,  Devereux  and  Sorensen,  2006).  Common  tax  avoidance  channels, 
such  as  the  use  of  inter-company  debt,  locating  intangible  property  in  low  tax  jurisdictions 
and abuse of inter-company transfer pricing, would no longer be effective in reducing the tax 
burden  of  companies.  In  contrast,  adoption  of  only  a  subset  of  countries  would  lead  to 
intensified  tax  avoidance  problems  for  countries  that  have  not  adopted  the  reform.  For  the 
same reason, countries who have not adopted the reform would have an incentive to do so.  

In other words, if the EU was to unilaterally introduce a destination-based cash flow tax 
then there will continue to be incentives to shift profits through manipulation of transfer 
pricing, but the incentives will pull more towards the EU (potentially at the expense of the 
EU  tax  base).  The  interaction  of  a  destination-based  business  tax  system  with  traditional 
source-based business tax systems may also create new opportunities for tax avoidance. 

It should however be noted that to the extent that the DBCFT would apply only to business-
to-business  transactions  and  not  to  business-to-consumer  transactions  –  given  the  practical 
difficulty to implement this – the problems of the definition of a taxable presence and of the 
allocation of profit for the digital  sector would remain identical and that the solution would 

143 

 
 
 
 
 
still require an adaptation of the definition of a permanent establishment and of its attributed 
profits. 

144 

 
 
 
ANNEX  10: MACROECONOMIC IMPACT OF CHANGES IN THE CCCTB 
FORMULA 

To  simulate  the  effect  of  changes  to  the  formula,  the  CORTAX  model  –  a  computable 
general  equilibrium  model  –  was  used  (see  Annex  4  for  the  methodological  details).  In 
CORTAX  there  is  one  multinational  headquarter  per  country  with  subsidiaries  in  all  28 
Member  States,  that  is  multinational  enterprises  are  tax  resident  in  all  EU  Member  States. 
Thus  the  model  in  its  baseline  does  not  explicitly  account  for  the  problem  of  lack  of 
permanent  establishment.  This  is  instead  indirectly  captured  through  the  calibration  of  the 
current distribution of tax revenue across Member States.  

To model the impact of factoring in user contribution in the formula, four alternatives to 
the one currently proposed formula have been modelled. All formulas use the assumption 
that digital firms represent 5% of the economy.116 In the first three formulas, a 'digital input 
factor'  was  added  to  the  formula,  affecting  the  apportionment  of  profits  for  the  'digital 
companies' representing 5% of the economy. The location of digital firm activity by country 
was proxied using total page views, in relative terms, for the top 50 web sites across the EU. 
In the absence of data linking page views by multinational location, the same digital presence 
for all EU multinationals was assumed.117 The first two alternatives keep the formula for all 
other companies the same as before.  

(i) Alternative 1: four factors for the digital. 

0.05 * (1/8 wages, 1/8 employees, 1/4 capital, 1/4 sales, 1/4 user input) +  

0.95 *(1/6 wages, 1/6 employees, 1/3 capital, 1/3 sales) 

116  The  estimation  of  the  size  of  value  added  from  digital  products  is  challenging  and  no  agreed-upon 
methodology is yet available. Estimates depend on the employed definition of digital economy, for which there 
is  no  broad  consensus.  The  Boston  Consulting  Group  combines  data  from  the  OECD  and  national  statistical 
agencies  to  estimate  an  average  direct  contribution  of  the  digital  economy  to  GDP  in  G20  countries  of  5.1%, 
with a maximum in UK of 10.4% and a minimum in Indonesia of 1.4%. Alternative estimates from consulting 
firms and professional associations (like The Internet Association, which represents the interests of many giant 
companies: Google, Amazon, Airbnb, Salesforce, and many more) point to about 6% of GDP in the U.S. coming 
from purely Web-based businesses. The OECD Internet Economy Outlook 2017 estimates that 5.4% of global 
value added in the OECD area in 2015 directly comes from information and telecommunication (ICT) products 
although this sector encapsulates a wide array of activities going beyond web companies while possibly missing 
significant  major  digital  companies  (for  instance,  Amazon  is  listed  under  the  SIC  code  5961  which  is  not 
included in the OECD definition of ICT). UNCTAD (2017c) estimates that the value added for the EU amounts 
to 4.3%.  Taking stock of the lack of a consensus definition of the digital economy and absent any data more 
dependable than these, 5% looks like a reasonable estimate and we employ it as a conventional figure for our 
simulations. 
117 This is likely to put additional emphasis on subsidiaries relative to multinational headquarters, as some home 
country bias may exist. 

145 

 
 
 
 
                                                 
(ii) Alternative 2: user input for the digital. 

0.05 * (0 wages, 0 employees, 0 capital, 0 sales, 1 user input) +  

0.95 * (1/6 wages, 1/6 employees, 1/3 capital, 1/3 sales) 

(iii) Alternative 3: user input for the digital and sales for the traditional. 

0.05 * (0 wages, 0 employees, 0 capital, 0 sales, 1 user input) +  

0.95 * (0 wages, 0 employees, 0 capital, 1 sales) 

(iv) Alternative 4: sales for the digital and the traditional 

0.05 * (0 wages, 0 employees, 0 capital, 1 sales) +  

0.95 * (0 wages, 0 employees, 0 capital, 1 sales) 

As the results in Table (1) show, there is hardly any impact at the macro-level. Adding a 
digital  factor  for  digital  companies  while  keeping  the  formula  constant  for  all  other  firms 
(Alternatives  3  and  4),  results  in  a  negligible  additional  positive  economic  impacts  at  EU 
level.  If  one  applies  a  'sales  by  destination  principle'  (Alternatives  3  and  4),  at  least  for  all 
non-digital companies, there is a negligible lower economic impact.118 There are two factors 
that  suggest  that  the  overall  impact  could  be  slightly  larger.  First,  if  one  takes  into  account 
that the share of the digital economy is likely to grow significantly, the impact should grow 
accordingly  for  Alternatives  1  and  2.    If  one  assumed  growing  compliance  costs  in  the 
baseline scenario due to new national measures applied over time, the impact would be more 
positive as well. 

Table (1): Economic effects of applying different formulas in the CCCTB for the EU aggregate 

118 A key advantage, not captured here, is that the destination of sales cannot be easily manipulated because, in 
any case, companies always have an incentive to sell as much as possible in a given location. In the US, where 
states  use  formulary  apportionment  to  attribute  corporate  tax  base,  there  has  been  a  trend  to  increasingly  use 
sales in the formula (and in parallel, reduce the weight of other factors) (Yonah et al, 2014). 

146 

 
 
 
                                                 
CCCTB-
MNEs 
Baseline 
-0.150 

1.578 

0.720 

0.355 

0.531 

-0.478 

0.120 

CCCTB-
MNEs (1) 

CCCTB-
MNEs (2) 

CCCTB-
MNEs (3) 

CCCTB-
MNEs (4) 

-0.150 

-0.151 

-0.142 

-0.142 

1.582 

0.721 

0.355 

0.532 

1.593 

0.723 

0.357 

0.535 

1.569 

0.699 

0.356 

0.522 

-0.479 

-0.482 

-0.474 

0.120 

0.120 

0.117 

1.557 

0.695 

0.354 

0.519 

-0.470 

0.117 

Cost of capital  
(% points change) 
Investment  
(percentage change) 
Wage   
(percentage change) 
Employment 
 (percentage change) 
GDP   
(percentage change) 
Revenue CIT (% 
GDP) 
Welfare 
 (% GDP) 

Source: European Commission Joint Research Centre, based on the CORTAX model. The baseline corresponds 
to the simulation in Table B.49 of Appendix B in Joint Research Centre of the European Commission (2016). 

147 

 
 
 
 
 
 
ANNEX  11: COMPATIBILITY OF PREFERRED INTERIM SOLUTION WITH EU 
LAW 

The preferred interim option is compatible with the fundamental freedoms of the TFEU. 
Currently  member  States  are  allowed  to  design  their  own  direct  tax  systems,  however  they 
have  to  respect  the  obligations  imposed  by  the  Treaties.  Considering  its  main  features,  the 
interim solution would not infringe the internal market freedoms of establishment119 (article 
49  TFEU)  and  to  provide  services120  (article  56  of  TFEU)  as  interpreted  by  the  CJEU.  The 
scope  of  the  tax  will  include  both  non-resident  and  domestic  transactions  and  companies. 
Cross-border activities/companies will be not taxed heavier than similar domestic ones. In the 
light of the CJEU121 only one rate will apply. Thresholds have to be set in such a way as to not 
systematically exclude domestic companies from the scope of the tax. 

The preferred interim option would also be compatible with VAT rules. According to the 
VAT Directive, any taxes, duties or charges are compatible with VAT as long as they cannot 
be characterised as turnover taxes. As interpreted by the existing case-law of the CJEU, any 
tax, duty or charge is not to be found as qualifying as 'turnover tax' if it does not display at 
least one of the essential characteristics of VAT. Such essential characteristics of VAT have 
been  defined  by  the  CJEU  in  the  following  way122:  (i)  it  applies  generally  to  transactions 
relating to goods or services; (ii) it is proportional to the price charged by the taxable person 
in return for the goods and services which he has supplied; (iii) it is charged at each stage of 
the  production  and  distribution  process,  including  that  of  retail  sale,  irrespective  of  the 
number of transactions which have previously taken place; and (iv) the amounts paid during 
the  preceding  stages  of the  process are  deducted  from  the  tax  payable  by  a taxable person, 
with the result that the tax applies, at any given stage, only to the value added at that stage and 
the final burden of the tax rests ultimately on the consumer.  

The interim measure could not be seen as having the essential characteristics 1 and 4 of 
VAT,  given  that  it  would  not  be  applied  to  goods  and  services  generally123,  and  that  no 
deduction of tax paid in previous stages of the production would be allowed. As regards the 

119 CJEU, judgement of 14 September 2017, Trustees of the P Panayi Accumulation & Maintenance Settlements, 
C‑646/15,  EU:C:2017:682,  paragraph  43"All  measures  which  prohibit,  impede  or  render  less  attractive  the 
exercise of the freedom must be considered to be restrictions on freedom of establishment (judgment of 21 May 
2015, Verder LabTec, C‑657/13, EU:C:2015:331, paragraph 34 and the case-law cited)"  
120 CJEU, judgment of 22 October 2014, Blanco and Fabretti, joined Cases C-344/13 and C-367/13, 
EU:C:2014:2311.  
121 CJEU, judgment of 5 February 2014, Hervis Sport, C-385/12, EU:C:2014:47. 
122 CJEU, judgment of 3 October 2003, Banca popolare di Cremona, C-475/03, EU:C:2006:629, paragraph 28; 
CJEU,  judgment  of  11  October  2007,  Kogaz  and  others,  C-283/06,  EU:C:2007:598,  paragraph  37.  See  also 
CJEU,  judgment  of  8  June  1999,  Pelzl  and  others,  C-338/97,  EU:C:1999:285,  paragraph  21;  and  CJEU, 
judgment of 31 March 1992, Dansk Denkavit, C-200/90, EU:C:1992:152, paragraph 11;  

123 See CJEU, judgment of 19 March 1991, Giant v Overijse, C-109/90, EU:C:1991:126, paragraph 14. 

148 

 
 
 
                                                 
essential  characteristic  2  of  VAT,  where  there  is  a  tax  based  on  the  gross  turnover  of  a 
business during a specific period, it would not be possible to determine the precise amount of 
that  charge  which  may  be  passed  on  to  the  client.  Based  on  the  existing  case-law  of  the 
CJEU,124 if it is not certain if and to what extent that tax will be borne by the final consumer, 
the tax cannot be said not to be proportional to the price charged, and  therefore, the measure 
cannot be seen as having the essential characteristic 2 of VAT.  

Given that at least one of the essential characteristics of VAT is not displayed, it seems safe to 
assume that the interim measure does not jeopardise the functioning of the common system of 
VAT by being levied on the movement of goods or services and on commercial transactions 
in a way comparable to VAT, and that it would not qualify as a 'turnover tax' for the purposes 
of Article 401 of the VAT Directive, thus being VAT-compatible. 

124 See Pelz and others, paragraph 25; and Giant v Overijse, paragraph 14. 

149 

 
 
                                                 
ANNEX 12: INTERIM SOLUTION – HOW IT WOULD WORK IN PRACTICE 

Example 1 – advertising activities (I) 
This scenario covers the provision of services consisting in the making available of advertising space online, by a third-country taxable person to another third-country party. 
The services target users in the EU. The revenues obtained from the supply of the advertising service are paid from the third country, but since the targeted users are in the 
Member State 1 and Member State 2, DST is due in those Member States. The DST due is apportioned between Member States 1 and 2 according to the number of times an 
advertisement has been displayed (we assume one display for each user). Therefore, the DST is divided equally between Member State 1 and Member State 2.  

UserThird countryMember State 1 (MS1) DST taxable revenues = EUR 1000  Place of taxation? Member States where users are located (MS1 and MS2). Apportionment in each MS propportional to the number of users in those MS (EUR 500 in each MS)  DST due in MS1 (3% x 500) = EUR 15  DST due in MS2 (3% x 500) = EUR 15Tax authority MS1UserMember State 2 (MS2)Tax authority MS2EUR 1000 DST rate = 3%  It is assumed that all payments are in EURTaxable personSupply of digital services“making availableadvertisingspace”onlineadvertisingonlineadvertisingDST (MS2) = EUR 15DST (MS1) = EUR 15 
 
 
 
 
Example 2 – advertising activities (II) 
Same as Example 1, but the taxable person not only targets EU online users, but also users in the third country, and the payment cannot be linked to a specific supply of online 
advertising service but constitutes consideration for all of them. No DST liability arises in respect of users in the third country, although users outside of the EU are taken into 
account for the apportionment of taxable revenues to the EU. Another characteristic of this scenario is that the number of users in Member State 1 doubles the number of users 
in Member State 2. That will be reflected in the apportioned DST to be paid in Member State 1 and Member State 2.  

151 

UserThird countryMember State 1 (MS1)Tax authority MS1UserMember State 2 (MS2)Tax authority MS2EUR 1000 DST rate = 3%  It is assumed that all payments are in EURTaxable personSupply of digital services“making availableadvertisingspace”onlineadvertisingonlineadvertisingDST (MS2) = EUR 7.5DST (MS1) = EUR 15UserUseronlineadvertisingDST× (MS1 has double users than MS2)(MS1 has double users than MS2) DST taxable revenues = EUR 1000  Place of taxation? Member States where users are located (MS1 and MS2) Apportionment in each MS proportional to the number of users in those MS (EUR 250 in third country, EUR 500 in MS1 and EUR 250 in MS2) DST due in MS1 (3% x 500) = EUR 15  DST due in MS2 (3% x 250) = EUR 7.5 
 
 
 
Example 3 – advertising activities (III) 
In this case, the taxable person is established in the EU (Member State 3), unlike in example 2. Because of that, the online advertising targeting "domestic" users in Member 
State 3 must be taken into account, and DST will be payable in Member State 3 too. Again, the number of times an advertisement has been displayed in each Member State 
will have to be taken into account for the apportionment of DST.    

152 

UserMember State 3Member State 1 (MS1)Tax authority MS1UserMember State 2 (MS2)Tax authority MS2EUR 1000 DST rate = 3%  It is assumed that all payments are in EURTaxable personSupply of digital services“making availableadvertisingspace”onlineadvertisingonlineadvertisingDST (MS2) = EUR 7.5DST (MS1) = EUR 15UserUseronlineadvertising(MS1 has double users than MS2)(MS1 has double users than MS2)Tax authority MS3DST (MS3)= EUR 7.5This (domestic) transaction is taken into account (user in EU)(MS1 has double users than MS3) DST taxable revenues = EUR 1000  Place of taxation? Member States where users are located (MS1, MS2 and MS3) Apportionment in each MS proportional to the number of users in those MS (EUR 500 in MS1, EUR 250 in MS2 and EUR 250 in MS3) DST due in MS1 (3% x 500) = EUR 15  DST due in MS2 (3% x 250) = EUR 7.5 DST due in MS3 (3% x 250) = EUR 7.5 
 
 
 
Example 4 – online platforms (I) 
This  scenario  covers  the  provision  of  services  consisting  in  the  making  available  of  online  platforms  allowing  its  users  to  meet  and  interact  (we  assume  that  there  is  an 
underlying supply between the users). That service is provided by a third-country taxable person to users in the EU. In this scenario, both users pay to the online platform for 
being able to access it and to conclude transactions between them. The place of taxation is where the users are (Member State 1 and Member State 2), and DST must be 
apportioned based on the number of users having concluded a transaction in a given Member State (in this case, equally divided between Member State 1 and Member State 
2).  

153 

UserThird countryMember State 1 (MS1)Tax authority MS1UserMember State 2 (MS2)Tax authority MS2 DST rate = 3%  It is assumed that all payments are in EURTaxable personSupplies ofdigital services“makingavailableonline platform”DST (MS2) = EUR 1.5DST (MS1) = EUR 1.5Underlying relationship between users (through platform)EUR 50EUR 50 DST taxable revenues = EUR 100 Place of taxation? Member States where users are located (MS1 and MS2) Apportionment in each MS proportional to the number of users in those MS (EUR 50 in MS1 and EUR 50 in MS2) DST due in MS1 (3% x 50) = EUR 1.5 DST due in MS2 (3% x 50) = EUR 1.5 
 
 
 
Example 5 – online platforms (II) 
Same as example 4, but only one of the two users of the online platforms pays for the digital service received. That does not affect the place where the DST is due (Member 
State  1  and  Member  State 2),  which  is determined  based on  the  location of  the users having  concluded  an underlying  transaction,  and  irrespective  of  the place  where  the 
payment is made. The fact that one of the users accesses the platform and concludes underlying transactions for free has no impact. 

154 

UserThird countryMember State 1 (MS1)Tax authority MS1UserMember State 2 (MS2)Tax authority MS2 DST rate = 3%  It is assumed that all payments are in EURTaxable personSupplies ofdigital services“makingavailableonline platform”DST (MS2) = EUR 1.5DST (MS1) = EUR 1.5Underlying relationship between users (through platform)EUR 100NO paymentfor use of the platform DST taxable revenues = EUR 100 Place of taxation? Member States where users are located (MS1 and MS2) Apportionment in each MS proportional to the number of users in those MS (EUR 50 in MS1 and EUR 50 in MS2) DST due in MS1 (3% x 50) = EUR 1.5 DST due in MS2 (3% x 50) = EUR 1.5 
 
 
 
Example 6 – mixed business models 
This scenario illustrates a taxable person established in a third country with a mixed business model, obtaining revenues from several activities (the making available of an 
online platform, but also the sale of his own goods via a website). In such a case, it is necessary to identify the several revenue streams that the company has. Those revenues 
corresponding to the online sale of goods would remain out of the scope of the DST (they would not qualify as taxable revenues), and this is why the DST liability of the 
company would not change in respect of example 4.  

155 

UserThird countryMember State 1 (MS1) TOTAL revenues = EUR 400 DST taxable revenues = EUR 100 (EUR 300, from supply of goods, out of scope) Place of taxation? Member States where users are located (MS1 and MS2) DST taxable revenues, apportionment in each MS proportional to the number of users in those MS (EUR 50 in MS1 and EUR 50 in MS2) DST due in MS1 (3% x 50) = EUR 1.5  DST due in MS2 (3% x 50) = EUR 1.5Tax authority MS1UserMember State 2 (MS2)Tax authority MS2 DST rate = 3%  It is assumed that all payments are in EURTaxable personSupplies ofdigital services“makingavailableonline platform”DST (MS2) = EUR 1.5DST (MS1) = EUR 1.5Underlying relationship between users (through platform)EUR 50EUR 50UserMember State 3 (MS3)Tax authority MS3Supply of goods (contracted online) 300 EUR× DST 
 
 
Example 7 – obligations (OSS) 
The tax envisages the use for taxable persons of a One-Stop-Shop (OSS) in order to register, submit the DST return, and pay DST. That means that he has a single contact 
point ("Member State of identification") through which all these obligations will be fulfilled. It is for the Member State of identification to exchange the information obtained 
from the taxable person (identification and DST return), as well as to pay the corresponding amounts of DST due in other Member States. 

156 

Third countryMember State 1 (MS1) DST liability in MS1, MS2, MS3, MS4.Tax authority MS1Taxable personMember State 2 (MS2)Tax authority MS2Member State 3 (MS3)Tax authority MS3Member State 4 (MS4)Tax authority MS4registration+ “OSS return”+ pay total DST (MS1, MS2, MS3, MS4)Taxable person has chosen MS1 as “MS of identification”payDST (MS2)payDST (MS3)payDST (MS4) MS1 will share with MS2, MS3 and MS4 info about identification and DST return.  
 
 
ANNEX  13: WORK AT THE OECD  

Tax Policy Approach and Timeline of the OECD work on the interim report of the 
OECD Task Force for the taxation of the digital economy 

Tax policy approach of the OECD for the taxation of the digital economy. 

The latest meetings of the Task Force on the Taxation of the Digital Economy (TFDE) were 
held in Paris from 11.12 to 13.12. 2017 and from 13.3. to 15.3. 2018. Before the December 
Paris meeting there were trilateral (EE PR & Council Secretariat General, OECD and COM) 
and bilateral (OECD and COM) meetings to discuss and coordinate. This close coordination 
is  reflected in  the ECOFIN Council Conclusions from 5 December 2017 for the taxation  of 
the digital economy.  

Main elements covered in the OECD Interim report 

The OECD interim report on the taxation of the digital economy was published and presented 
to the G20 Finance Ministers in March 2018. The interim report reflects different options to 
address these challenges and the OECD intends to seek a consensus based solution by 2020. 

The table below illustrates the main elements of the OECD interim report with a reference and 
comparison to the corresponding elements in the EU project. 

–Element in the OECD interim report 
Taxation challenges arising from the 
digitalisation of the economy (Chapter 1) 
Business models and value creation in the 
digitalised economy (Chapter 2) 
Progress with BEPS implementation and 
tax policy developments in the taxation of 
the digitalised economy (Chapters 3 and 4)  

Adapting the international tax system and 
options for interim measures (Chapters 5 
and 6)  

Impact of digitalisation on other aspects of 
the tax system: opportunities and risks 
(Chapter 7) 
Conclusions & next steps (Chapter 8) 

Corresponding EU elements  
Commission Communication from 21.9.2017 and 
this impact assessment report 
This impact assessment report 

This impact assessment report (description of the 
dynamic baseline). The main implementation of 
the outcome of the OECD BEPS project is 
included in the two Anti-Tax Avoidance 
Directives adopted in 2016). 
EU comprehensive measures consisting of a 
proposal for a Council Directive on digital 
presence and profit allocation rules for intra EU 
situations and a Recommendation for amending 
Double Tax Conventions concluded between EU 
Member States and third countries. 

The EU interim measure will be a proposal for a 
Council Directive on a common system of a tax on 
certain digital services.  
Not part of the Commission March package.  

The Bulgarian presidency is planning to treat the 

 
 
 
 
EU legislative proposals as a priority. Four 
meetings are scheduled in April. The incoming 
Austrian presidency also has expressed an interest, 
but no decision has been taken.  

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